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Thursday, August 13, 2009

Dorothea Lange End of the road June 1935Children of Oklahoma drought refugees on highway near Bakersfield, California. Family of six; no shelter, no food, no money and almost no gasoline. The child has bone tuberculosis

Ilargi: 47 economists in a Wall Street Journal survey, and 53 in a Bloomberg one, say the recovery is here and the recession is over. That would add up to a nice even 100, but I'm afraid many might be the same. When reading through the two articles about the surveys, I find it -literally- hard to see what the optimism is based on. There is talk of confidence indices, the Obama stimulus gets mentioned, as does a Fed $1.45 trillion mortgage debt purchase. The consensus expectation is for unemployment to stay below 10%, but there's no reason(ing) provided for that.

The closest thing to a concrete fact I can find in either piece is the "better-than-expected employment report for July, where employers cut 247,000 jobs and the jobless rate fell for the first time in 15 months". And yes, that does sound nice, but those numbers cover just one month, and so many if's, but's and maybe's have been pointed out since they were published that they can only be a very slim foundation to base so much optimism on.

So I have to say, I don't know why the 47+53 club expects economic growth, recovery, any of that. There may well be better formulated grounds, but in the absence of such grounds, I feel left quite cold and alone with faith-based "economics". Of course, what I've left out thus far is what may well be the main reason for the hosanna feeling: the surge in stock markets. Still, I'm sure at least some of the economists would recognize that rising share prices are, all on their own, a questionable indicator for an economy that's been mired in recession/depression for, depending on your calendar, 10 or 20 months.

Now, I vividly remember many separate occasions on which many separate economists have alluded to two distinct sectors of the economy as the most important, make or break, ones. Those two are housing and employment, obviously. So if both those surveyed and the reporters writing about the survey fail to come up with concrete examples, I'd humbly suggest looking there.

Sure, officially "only" 247,000 people lost their jobs in one month, and the continuing jobless rate fell a bit. But first of all, anyone who can read by now understands that these BLS slash goverment numbers are not the undisputed final word on the topic. And moreover, let's see: one third of all America's jobless are long term unemployed, as in longer than 26 weeks. That's 4.4 million people. By December, 1.5 million will be out of a job for longer than any extended benefit timeframe will cover, i.e. on average a year or more. The number who fall off the back end of these stats make the data that claim the continuing jobless rate went down look suspicious.

It's not going to stop with those 1.5 million more or less perpetually hopeless. In fact they're merely the vanguard of an abundant legion that is being raised in the nation of people who are not just jobless, but simply and outright hopeless. What happens to the official U3 unemployment rate remains to be seen, but, again, one month does not a summer make, even if the numbers would be taken at face value. It would be much more useful for every reporting party to switch to the U6 data, since they encompass such large groups of people that we would all intuitively see as unemployed, but I digress for now.

Still, the unemployment stats hardly seem to point straight at recovery and growth. Everyone agrees the numbers will keep going up, the only real discussion is by how much.

The second pivotal indicator, besides jobs, is housing. For that, we can turn to today's news. Home sales in the 2nd quarter rose 3.8% from the first. That looks like good news, but not so fast. Home prices, for existing homes, fell by a record 15.6% over last year, the most in 30 years of record keeping. Yet another record was set by the number of foreclosure filings. 360,000 homes received such a filing in July, in one single month! And that's with state and federal anti-foreclosure programs in place.

So, excuse me, but no, I don't see a reason for optimism in housing either. I think the 47+53 economists have just proven once more that their field is very far away from being a science, that they are selling religious messages. And of course you can say: hey, it works for Christianity, so why not give it a go. But not even priests pretend to be scientists.

Luckily for all of us there are still analysts around, albeit not that many, who don't feel satisfied with just stories and belief systems.

Harry Markopolos predicts a major implosion in the CDS market. We don’t know what he bases that on, and we don't want to slip into faith as well, but such an event is on the way, be it sooner or later. Nassim Taleb sums it up like this (as assembled by Clusterstock):

We're all in denial

We're replacing private debt with public debt.

We're not dealing with the cancer in our banking system.

We're not making the structural changes we need to make.

We're not being aggressive enough about restructuring debt (debt for equity swaps).

While Elizabeth Warren (surprisingly dark for a government employee) adds these pointers:

The banks are still insolvent.

That little tweak to mark-to-market accounting a couple of months ago has allowed us all to plunge into deep denial.

Now that the banks are allowed to lie about what their toxic assets are worth, they'll never sell them (because if they did they would have to write them down).

The smaller banks are undercapitalized and will have to raise another $12-$14 billion.

And Robert Prechter finishes off the position of the not-so-rosy:

Yes, the late 2007-early 2009 market debacle was just a warm-up to what Prechter believes will be the bear market's main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble.

The 2000 market peak market a "major trend change" for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. "The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large," he says. "The bear market is going to have to balance that out with some sort of significant retrenchment."

How significant does Prechter think that retrenchment will be?

"This is the kind of top, the kind of degree, that we haven't seen for a couple of hundred years."

Yup. We're in for nasty weather. The markets are up 45%, while all serious indicators in the economy have worsened substantially, since their lows 5 months ago. Now, if you were a practical person, if you wanted proof instead of stories that "the worst may be over", where would you think those markets are likely to be headed?

It's still all about the toxic debt, nation. That is where the answers lie. Useless mortgage backed securities mixed with lost wagers on everything under the sun. Markopolos may or may not have the correct call on CDS revelations. But what's certain is that if home prices drop at record levels, so do the securities written on them. That means the toxic debt continues to become even more toxic, not less.

But, yes, I know, faith is a tempting proposition for the fickle human mind.

One more thing: I said when the crash started that you don't need the banks that were then starting to be bailed-out, that what you need is access to your money, plain and simple, which the government could guarantee through post office or supermarket. Today, Elizabeth Warren says this:

"The question of whether or not you think the world as we know it has ended, depends on what you think the world IS as we know it. If you think the world as we know it are a handful of huge financial institutions, the dinosaurs that roam the earth, then you're right; they’re not going to exist without HUGE infusions of government money.

On the other hand, if what you really believe is our economy and our world is [..] 115 million American households that are out there, that need jobs, you start to see it very differently, you think: the dinosaurs are gone, and [there’s still a lot of stuff to be done.]"

The year-over-year drop in the median sales price of single family homes showed its worst decline ever.

Home price declines in the U.S. accelerated in the second quarter, dropping by a record 15.6 percent from a year earlier, as foreclosures weighed on values. The median price of an existing single-family home dropped to $174,100, the most in records dating to 1979, the National Association of Realtors said today. Total sales rose 3.8 percent to a seasonally adjusted annual rate of 4.76 million from the first quarter and fell 2.9 percent from 2008’s second quarter.

Prices fell in 129 out of 155 metropolitan areas from a year ago and 39 states experienced sales increases from the first quarter, the Chicago-based realtors group said. Sales in U.S. housing market at the heart of the global recession are beginning to stabilize, said Patrick Newport, an economist for Lexington, Massachusetts-based IHS Global Insight. "I don’t think we’re at a bottom yet in home prices," said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis. "There’s also a pretty big shadow supply of houses. People are kind of waiting for the bottom but there’s a pent-up supply out there." Home prices are falling even as a survey of economists indicates that the U.S. economy is recovering from the worst recession since the 1930s. The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey.

The median existing home price fell 9.7 percent in the Northeast from the same period a year earlier to $246,000, the group said. Sales jumped 15 percent from the first quarter and are down 8.4 percent from a year ago. In the Midwest, prices fell 8.6 percent to a median of $146,800 from a year earlier. In the South, prices slid 10.3 percent to $158,600. In the West, they declined 26.6 percent to $212,600. The largest decline was in the Cape Coral-Fort Myers metropolitan region, where the median price fell 53 percent to $84,000 from a year earlier. The second-largest decline was in the Las Vegas, Nevada, region, where prices fell 39.7 percent, followed by the Riverside-San Bernardino-Ontario metro area in California, where prices fell 39.1 percent.

The biggest increase in prices was in the Davenport-Moline- Rock Island area of Illinois and Iowa, where prices surged 30.6 percent to $113,200 from a year earlier. The second biggest jump was in the Cumberland metro area of Maryland and West Virginia, where prices rose 21.7 percent. The Elmira, New York, area had the third-biggest increase, where prices rose 11.3 percent. Home prices are tumbling even as mortgage rates remain near all-time lows. The average U.S. rate for a 30-year fixed home loan was to 5.22 percent last week, down from 5.25 percent the prior week, according to mortgage buyer Freddie Mac of McLean, Virginia. The rate dipped to 4.78 percent in April, the lowest ever recorded.

U.S. foreclosure filings -- notices of default, auction or bank seizure -- rose to a record in 2009’s first half, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. More than 1.5 million properties, one in every 84 U.S. households, received a foreclosure filing, RealtyTrac said in a July 16 report. Homes in or near default typically sell for about 20 percent less than non-distressed property, according to the Realtors group. Those sales reduce the value of each surrounding home by an average $8,667 because the lower price is used by appraisers to set values for other properties in the area, according to the Center for Responsible Lending in Durham, North Carolina.

The world’s largest economy will contract 1.3 percent this year, according to a July 10 forecast by Fannie Mae. The U.S. unemployment rate may climb to 9.9 percent in 2010, from 9.3 percent this year, according to the mortgage buyer controlled by the U.S. government.

U.S. home loans failed at a record pace in July despite ongoing federal and state programs to avoid foreclosures, which have severely strained housing and the economy. Foreclosure activity jumped 7 percent in July from June and 32 percent from a year earlier as one in every 355 households with a loan got a foreclosure filing, RealtyTrac said on Thursday. Filings -- including notices of default, auction and bank repossession -- have escalated with unemployment.

"July marks the third time in the last five months where we've seen a new record set for foreclosure activity," James J. Saccacio, RealtyTrac's chief executive, said in a statement. "Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we're seeing significant growth in both the initial notices of default and in the bank repossessions."

More than 360,000 households with loans drew a foreclosure filing in July, a record dating back to January 2005, when RealtyTrac started tracking monthly activity. Notices of default, auction or repossession have reached nearly 2.3 million in the first seven months of the year -- with more than half a million bank repossessions, the Irvine, California-based company said. Making timely payments keeps getting more harder for borrowers who have lost their jobs or seen their wages cut. The unemployment rate is 9.4 percent and President Barack Obama has said he expects it will hit 10 percent.

Obama's housing rescue is gaining traction in altering terms of loans for struggling borrowers, but slowly. Earlier this month the U.S. Treasury Department detailed the progress of the top servicers in modifying loans and prodded them to step up efforts to stem foreclosures. States where sales and prices surged most in the five-year housing boom early this decade remain hardest hit. California, Florida, Arizona, Nevada accounted for almost 57 percent of total U.S. foreclosure activity in July. Illinois had the fifth-highest total filings, spiking nearly 35 percent from June, in an example of how moratoriums often delay rather than cure an inevitable loan failure.

Default notices spiked by 86 percent in July, from artificially low levels the prior two months. A state law enacted on April 5 gave delinquent borrowers up to 90 extra days before foreclosure started, RealtyTrac said. Michigan's foreclosure activity fell 39 percent in July from June, mostly due to a 66 percent drop in scheduled auctions. A state law that took effect July 6 freezes foreclosure proceedings an extra 90 days for homeowners who commit to work on a loan modification plan. Other states with the highest foreclosure filing totals last month included Texas, Georgia, Ohio and New Jersey.

Nevada had the highest state foreclosure rate for the 31st straight month, with one in every 56 properties getting a filing, or more than six times the national average. Initial notices of default fell 18 percent in the month, with a new Nevada law taking effect on July 1 requiring lenders to offer mediation to homeowners facing foreclosure. Scheduled auctions and bank repossessions each jumped more than 20 percent, however, boosting overall foreclosure activity in the state by 4 percent from June. California, Arizona, Florida, Utah, Idaho, Georgia, Illinois, Colorado and Oregon were the other states with the highest foreclosure rates.

Ilargi: • Warren: On top of everything we have so far, we’ll see a 50-60% default rate on commercial mortgages, a problem that will be concentrated in intermediate and smaller banks.• (When asked if Hank Paulson made the right call bailing out Wall Street): "The question of whether or not you think the world as we know it has ended, depends on what you think the world IS as we know it. If you think the world as we know it are a handful of huge financial institutions, the dinosaurs that roam the earth, then you're right; they’re not going to exist without HUGE infusions of government money. On the other hand, if what you really believe is our economy and our world is [..]115 million American households that are out there, that need jobs, you start to see it very differently, you think: the dinosaurs are gone, and [there’s still a lot of stuff to be done.]

In late February, Robert Prechter of Elliott Wave International said "cover your shorts," and predicted a sharp rally that would take the S&P into the 1000 to 1100 range. With that prediction having come to pass, Prechter is now saying investors should "step aside" from long positions, and speculators should "start looking at the short side." "The big question is whether the rally is over," Prechter says, suggesting "countertrend moves can be tricky" to predict. But the veteran market watcher is "quite sure the next wave down is going to be larger than what we've already experienced," and take major averages well below their March 2009 lows.

Yes, the late 2007-early 2009 market debacle was just a warm-up to what Prechter believes will be the bear market's main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble. The 2000 market peak market a "major trend change" for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. "The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large," he says. "The bear market is going to have to balance that out with some sort of significant retrenchment."

On this morning's singularity event--Nassim Taleb and Nouriel Roubini together on Squawk Box--we found ourselves waiting for the two gloomsters to duke it out. It never really got nasty. But at one point Taleb did chide Roubini for being too friendly to the Fed chairman. "I always agree with Nouriel except on small point. But he has a weakness," Taleb said. "He likes Ben Bernanke too much."

Let me summarize my market thoughts, as expressed on RealMoney Silver over the past two weeks. As I see it, the bull market argument is that the U.S. is exiting the recession just like the many that preceded the current one. Consequently, corporate profits will exceed consensus forecasts in tandem with:

the resumption of revenue growth;

the record fiscal and monetary stimulation;

an export-led Asian recovery; and

the operating leverage associated with productivity gains achieved through draconian cost cuts and influenced by the benefits of wage deflation.

The bulls further argue in favor of Say's Law of Production (i.e., business drives consumer incomes and spending) and that the high-tax health and energy bills introduced by the President have been recently set back (as the Blue Dog Democrats and the liberal leadership are already battling).

The bear market argument that I have now embraced is that we are seeing nothing more than a second derivative recovery and that, owing to a temporary replenishment of inventories, the economy is only getting less worse (or getting better from a depressed level). The ingredients for a durable and self-sustaining recovery are missing as an economic double-dip grows more likely in a climate of corporate cost cuts, elevated jobless rates, wage deflation and continued pressure on personal consumption expenditures. Bears, such as myself, reject Say's Law of Production and view weakening consumer incomes and spending as a poor foundation and as inadequate drivers to improving business activity into 2010.

The economic downturn of 2007-2009 has already been different this time in scope and duration. For example, unlike the other post-depressions/recessions of the last century, we have already witnessed two consecutive quarterly drops in nominal GDP. As well, the 20-month-old recession has resulted in a near 4% drop in real GDP vs. drops of between 2.5% and 3.0% in the mid 1970s and early 1980s recessions. The U.S. economy came out quickly from those prior downturns, with recoveries to new peaks in economic activity taking only three or four quarters. My view is that it will continue to be different this time as the typical self-sustaining economic recovery of the past will not be repeated for 10 important reasons.

Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

The credit aftershock will continue to haunt the economy.

The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.

While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

Commercial real estate has only begun to enter a cyclical downturn.

While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

"The balance of financial terror ... is a situation where we [in the U.S.] rely on the cost to others of not financing our current account deficit as assurance that financing will continue."-- Lawrence SummersAmong the non-traditional headwinds listed above, a burgeoning fiscal deficit and the financial instability of our state and local municipalities are among two of the most significant challenges that face consumers, corporations and investors. Though the bulls generally agree with the presence of these intermediate-term challenges (especially the spiraling deficit and a nervous U.S. dollar stalemate), they generally dismiss them both over the short term, favoring the belief that the current upside surprises in earnings will dominate the market landscape in influence. I would argue that the aforementioned challenges are ever more predictable in consequence and will serve as a governor to further gains in market valuations.

An avalanche of spending by the public sector is now following an avalanche of spending by the private sector. In essence, we are (perhaps necessarily) fighting the slowdown with the same sort of incendiary kerosene that put us into the mess.

Profligate spending comes at a cost, a cost that we will experience sooner than later. It is only a matter of time before policy makers address the financing of this accumulated debt and the great reflation experiment of 2009 by raising taxes significantly. We have already witnessed the start of what is likely to become an avalanche of changing tax policy. New York City imposed its first sales tax increase in 35 years (rising from 8.375% to 8.875%), and, on the same day, the state of New Jersey imposed an additional tax hike on wholesale liquor distributors' sales of liquor and wine, which is sure to be passed on to the consumer. In Oakland, Calif., even the "high life" is being taxed as the city has recently passed a tax on marijuana sales and the state of California appears to be close in following Oakland's example.

This is just the start of a nascent and broad trend toward much higher taxes, a growth-impeding and P/E-diminishing secular development. The market optimism that we are now experiencing in the expectation of a clean handoff of the baton of stimulation from the consumer (2000-2006) to the government (2008-????) might be more short-lived than many believe, as the price of stimulation, regardless of whether it's source is the private or public sector, holds the promise of being more of a growth-retardant. With the debt super-cycle continuing apace (but in a public sector context), the fragility and inherently unstable "balance of financial terror" argues for a not-so-benign and extremely volatile stock market future.

Unquestionably, the animal spirits have been in full force as shorts are scrambling to cover and many more are joining the ever more vocal and growing bullish chorus. But to me, the margin of safety is becoming ever more thin as the enemy of the rational buyer -- namely, optimism -- reaches new heights. In summary, since a self-sustaining economic recovery appears doubtful, I do not believe that we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges discussed above.

Ilargi: CDS is only a $60 trillion market, but the mistake is the reporter's.

Harry Markopolos -- the whistleblower on Bernie Madoff who proved to be much smarter than the SEC -- says there are evildoers out there who will make the Ponzi scum "look like small-time." Markopolos gave a speech to 400 of the faithful at the Greek Orthodox Church in Southampton and predicted major scandals will soon be revealed about the unregulated, $600 trillion, credit-default swap market.

"To put it in simple terms, it is like buying fire insurance policies from five different insurance companies on your neighbor's house and then burning down the house," he said. After his lecture, Hampton Sheet publisher Joan Jedell reports Markopolos was feted at a dinner at Nello Summertimes hosted by John Catsimatidis and his wife, Margo, who were joined by Al D'Amato and Greek shipping magnates Nicholas Zoullas and Spiros Milonas.

Recovery from the worst recession since the 1930s has begun as President Barack Obama’s fiscal stimulus -- derided as insufficient and budget-busting months ago -- takes effect, a survey of economists indicated. The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey. Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003. "We’ve averted the worst, and there are clear signs the stimulus is working," said Kenneth Goldstein, an economist at the Conference Board in New York.

The new projections, following better-than-anticipated reports on manufacturing, employment and home construction, echo gains in investor confidence that have propelled the Standard & Poor’s 500 Stock Index to its high for the year. A rebound may help cushion declines in Obama’s approval ratings, political analysts said. "The fact that people for the first time in over a year are starting to look at some glimmers of hope plays to the prospect of some strength in the stimulus," said Susan Molinari, a Republican strategist in Washington who advised Rudy Giuliani during his presidential nomination campaign in 2008.

Confidence in the world economy surged to a 22-month high in August on signs the worst global recession since World War II is coming to an end, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index jumped to 58.12 this month from 39.13 in July. A measure of U.S. participants’ confidence in the world’s largest economy rose to 47.3 from 29.5, the survey showed.

There was just a one-in-five chance of a "double-dip" recession at some point in the next 12 months, where the economy shrinks again after starting to grow, according to the median of 33 economists answering a special survey question. The anticipated expansion in the coming year won’t be enough to prevent the unemployment rate from reaching 10 percent for the first time since 1983, the survey also showed. That will force the Federal Reserve to forego raising its benchmark interest rate until the third quarter of 2010, according to the median projection.

The Fed’s policy-setting Open Market Committee today kept the target rate near zero and retained plans to buy as much as $1.45 trillion of housing debt by year-end to help secure a recovery. Central bankers said they will slow the pace of the program to buy Treasury securities and anticipated the full $300 billion commitment will be purchased by the end of October. Obama’s $787 billion economic recovery effort, spanning tax cuts, infrastructure spending and a goal to create or save 3.5 million jobs, was enacted about six months ago. Republican lawmakers, nearly all of whom voted against the package, have pilloried the plan as a waste of money.

"Trillions more in Washington spending will not end a recession, it only puts future generations under a mountain of unsustainable debt," House Minority Leader John Boehner, an Ohio Republican, said last week. The nonpartisan Congressional Budget Office estimated last week that the stimulus has pumped $125 billion into the economy so far. A federal program to replace older vehicles with more fuel- efficient ones helped boost sales of cars and light trucks last month to the highest level since September, according to industry figures. Automakers, operating with lean inventories, will resume output to meet the jump in demand. "Cash-for-clunkers was the icing on the cake," said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. "It’s well-timed stimulus syncing with cyclical forces leading to a ramping up of production."

Company heads seeing an improvement include David Weidman, chief executive officer of Dallas-based chemical maker Celanese Corp. "We exited the quarter with increasing optimism," and there are "clear signs of economic recovery," Weidman said in an interview in July. "The stimulus was really a long-term political and economic play by the administration, and now they’re starting to see the results they wanted," said Bill Buck, a Democratic strategist who worked on the presidential campaigns of former Vice President Al Gore and retired General Wesley Clark. "The administration would be wise to use this to build their credibility with the public" on other issues like health care, he said.

The president’s approval rating is falling on concern over rising joblessness and the growing budget deficit, a Quinnipiac University poll showed last week. Half of the registered voters surveyed from July 27 to Aug. 3 by Quinnipiac said they approve of the job Obama is doing, compared with 42 percent who disapprove. That’s down from 57 percent approval and 33 percent disapproval in a late June poll. Americans are hurting as employers continue to cut jobs, albeit at a slower pace. The unemployment rate will average 9.8 percent in 2010, according to the Bloomberg survey taken from Aug. 5 to Aug. 11. "The labor market is going to be the key," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "The risk isn’t that it gets much worse, but that it doesn’t improve quickly enough. It’d be nice if the consumer found his legs."

Consumer spending, which accounts for about 70 percent of the economy, will rise an average 1.5 percent from July to December, up from prior estimates, the survey showed. "What’s happening now is a leveling off, not a strong increase in growth, and that owes a little to the stimulus package," said Robert Solow, a Nobel laureate and professor emeritus at the Massachusetts Institute of Technology in Cambridge, Massachusetts. "Seeing the rest of it filter through to the economy in the second half of the year will be extremely helpful."

Dr. Doom finally capitulates: Global recovery by the end of the year. (Okay, yes, a double-dip is still a possibility--for lots of good reasons. And before you bash Nouriel for missing the turn, at least admit that he got the recession a heck of a lot more right than most people. And he did turn less negative several months ago.) And note that he still thinks house prices will drop a total of 40%.

Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman, and they said there is a 71% chance that President Barack Obama will ask him to stay on, according to a survey. Meanwhile, the majority of the economists The Wall Street Journal surveyed during the past few days said the recession that began in December 2007 is now over. Battling the downturn defined most of Mr. Bernanke's term, which began in early 2006 and expires in January, and economists say his handling of the crisis has earned him four more years as Fed chief.

"He deserves a lot of credit for stabilizing the financial markets," said Joseph Carson of AllianceBernstein. "Confidence in recovery would be damaged if he was not reappointed." The Journal surveyed 52 economists; 47 responded. After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the "cash for clunkers" car-rebate program.

A better-than-expected employment report for July, where employers cut 247,000 jobs and the jobless rate fell for the first time in 15 months, suggests the worst is over. The unemployment rate is still expected to rise to 9.9% by December, but economists forecast that the economy will shed far fewer jobs over the next 12 months than they had forecast last month. Many of the economists said there is little to be gained by changing the Fed chairman, especially considering the massive task at hand for the central bank as the economy emerges from the recession.

"Continuity is critical as we emerge from this crisis. Otherwise we could slip back in again," said Diane Swonk of Mesirow Financial. "Bernanke is the best suited to undo what has been done when the time comes." The Fed has taken unprecedented steps in an effort to avoid another Great Depression, and its exit strategy remains a key question. Some hints may emerge as the central bank's August policy meeting comes to an end Wednesday. The Fed's key policy-making tool, the federal-funds rate, isn't likely to change at this meeting or any time soon.

Only six economists expect the Fed to raise the federal-funds rate, now between 0% and 0.25%, this year. Most expect an increase at some point in 2010, but more than a quarter of respondents don't see the rate moving until 2011 or later. "The exit strategy will be very, very slow and cautious," said John Silvia of Wells Fargo. "The Fed will unwind the balance sheet before they raise the fed funds rates." The Fed's balance sheet -- the total value of all its loans and securities holdings -- had more than doubled during the course of the crisis to more than $2 trillion, as lending facilities expanded in an effort to unfreeze credit markets.

But as markets get back to normal, demand already has begun to wane, and the balance sheet has started to shrink. Now the composition of the balance sheet has begun to shift to Treasurys, mortgage-backed securities and agency debt as the Fed moves through a $1.75 trillion program announced in March to bring down long-term interest rates. The Fed is deciding at this week's meeting whether to let that program run its course and how best to communicate its intentions to markets.

Whatever the Fed decides, the economists expressed some confidence that the central bank will be dealing with how to manage a recovery, not another recession. They expect GDP growth to remain above 2% at an annualized rate through the first half of next year, and they put the chances at just 20% of a "double-dip" second downturn before 2010. But some said a recovery could make Mr. Bernanke's road to reappointment more rocky. "Once it is perceived that the economy is on its way to recovery, it gives Obama the opportunity to put in his own person," Mr. Silvia said. "It could be like Great Britain at the end of World War II. 'Thank you for all the hard work, Mr. Churchill, but we're going to bring someone else in to handle the next phase.'"

Former president George W. Bush appointed Mr. Bernanke to succeed the departing Alan Greenspan. Presidents appoint Fed chiefs to four-year terms, and there are no term limits. Mr. Bernanke's term expires Jan. 31. Though the economists were overwhelmingly supportive of Mr. Bernanke, they don't think his tenure was without mistakes. A slow initial response to the credit squeeze and the decision to let Lehman Brothers fail were cited as the biggest errors.

as reported in the US Treasury's TIC report. It's interesting that China did not surpass Japan until September of 2008; and that those two countries dwarf all the other holders. How long can Japan avoid having to redeem some of these assets to fund domestic social programs?

The collapse in commercial real estate is preventing Federal Reserve chairman Ben S. Bernanke from declaring the economy and financial markets are healed. Property values have fallen 35 percent since October 2007, according to Moody’s Investors Service. That’s making it tough for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls, and hotels this year, pressuring companies such as Maguire Properties Inc., the largest office landlord in downtown Los Angeles, to put buildings up for sale.

The industry is likely to be high on the agenda when Bernanke and his colleagues sit down in Washington today at the Federal Open Market Committee meeting on monetary policy. Lawmakers including Barney Frank and Carolyn Maloney are pushing the central bank to extend an aid program designed to restore the flow of credit. If nonresidential real estate remains in the doldrums, the Fed may be forced to leave emergency-lending programs in place and keep its benchmark interest rate close to zero for longer than some investors expect, given positive signs elsewhere in the economy.

Commercial property is "certainly going to be a significant drag’’ on growth, said Dean Maki, a former Fed researcher who is now chief US economist in New York at Barclays Capital Inc., the investment banking division of London-based Barclays PLC. "The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.’’ The Fed is "paying very close attention,’’ Bernanke, 55, told the Senate Banking Committee on July 22, the second of two days of semiannual monetary-policy testimony before the House and Senate. "As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices, and so, more pressure on commercial real estate.’’

The pressure may be easing in other areas of the economy. Gross domestic product shrank at a better-than-forecast 1 percent annual pace in the second quarter after a 6.4 percent drop the prior three months, and residential housing starts rose unexpectedly by 3.6 percent in June as construction of single-family dwellings jumped by the most since 2004, according to data from the Commerce Department.

Employers cut fewer workers than anticipated last month as the jobless rate fell to 9.4 percent from 9.5 percent in June - the first decline since April 2008, based on Labor Department figures. Amid such glimmers of improvement, commercial real estate is a "particular danger zone,’’ said Janet Yellen, president of the Federal Reserve Bank of San Francisco, in a July 28 speech in Coeur d’Alene, Idaho.

China's loan growth plunged in July while exports fell 23pc from a year ago after grinding lower for nine months as consumers in the West tighten their belts further. The data raise fresh doubts about the strength of global trade and whether the world can rely on China's growth miracle to power recovery. Separately, the Baltic Dry Index – measuring freight rates for bulk goods – has tipped over, dropping 25pc since late July. The shipping figures buttress reports that China has stopped building up stocks of metals and other commodities after a spate of frantic buying over the early summer.

China's central bank said loan growth fell to $52bn (£31bn) from $248bn a month earlier, although it is too early to tell whether Beijing has begun to rein in credit after the explosion of bank loans in the first half of the year. The loan figures are being watched closely by analysts and traders in the City. Excess liquidity in China has been a key driver of global markets since the rally began in March. Beijing is walking a tightrope by trying to offset the collapse in exports – almost 40pc of GDP – with an investment blitz in roads, railways, and industry through state-owned companies.

The real economy cannot absorb the money, so it is leaking into asset speculation. The central bank estimates that 20pc of fresh credit has ended up in equity markets. The Shanghai index is up 80pc this year, though profits have fallen by almost a third. The pattern echoes the final phase of Japan's Nikkei bubble in 1989. "China is a big fat tail risk for world markets," said Hans Redeker, currency chief at BNP Paribas. "Shanghai equities have reached the same extreme as in late 2007. The country will have to cut credit growth, and when this happens, Shanghai equities and commodities will suffer. That is what could bring this global rally to a halt."

China Construction Bank, the number two lender, is cutting loans by 70pc over the second half of the year. "We noticed that some loans didn't go into the real economy. Housing prices are rising too fast," said the bank's president, Zhang Jianguo. Andy Xie, a leading consultant, said China's boom was a "giant Ponzi scheme" that was likely to "bring very bad consequences" for the country. "The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by rising momentum," he said. Equities are overvalued by 50pc to 100pc.

Mr Xie, who wrote his doctoral thesis on Japan's bubble in the 1980s, said China's ratio of property prices to incomes is seven times higher than in the US. It costs three months' salary per square meter of space – arguably the highest in the world – though tower blocks are sitting empty. Prices are being propped up by state enterprises, abetted by local Communist bosses. Mr Xie said Chinese booms and busts follow a political rythmn. There is a deeply-rooted belief that the authorities can keep the game going – the "Panda put", China's answer to the "Greenspan Put" – and that the Communist Party will not let the rally fizzle before the 60th anniversary of the revolution on October 1. This belief is self-fulfilling, for a while.

Mr Xie expects China's rally to falter around October, followed by fresh shots of liquidity before the economy falls into a deeper slump by 2012. "Property prices could drop like Japan's in the last two decades, which would destroy the banking system," he said. Mr Xie said China's asset boom is the flip-side of the weak US dollar. US monetary stimulus is in effect leaking across the Pacific. Bust will follow when the dollar rallies, draining liquidity again. If the Fed tightens abruptly as it did under Paul Volcker in the early 1980s, the denouement could be painful for China.

Beijing deserves praise for trying to switch reliance from exports towards the domestic economy. It has had some success. Retail sales have risen 15pc over the last year. But Professor Michael Pettis from Beijing University said it is proving very hard to induce the Chinese to alter their spending habits. The cultural barriers will take years to overcome. Instead, the stimulus is feeding more industrial investment, leading to more excess capacity worldwide. While Chinese GDP continues to grow near 8pc, this is based on output. In the West, GDP growth is based on spending. These two definitions are chalk and cheese. The underlying story has not changed. The East-West imbalances that lay behind the Great Recession of 2008-2009 are getting worse, not better.

Yuan forwards declined the most in a month after a ninth monthly slump in China’s exports prompted traders to reduce bets on how far the currency will strengthen. Twelve-month non-deliverable contracts dropped after the customs bureau yesterday reported overseas sales slid 23 percent in July from a year earlier. The ICE’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was near this month’s high as Asian stock losses spurred demand for the perceived safety of the dollar.

"The dollar’s strength led to the plunge in yuan 12-month NDFs," said Liu Xin, an analyst at the Hong Kong branch of Bank of Communications Ltd., China’s fifth-biggest lender. "The disappointing export data also contributed to the drop." Twelve-month non-deliverable forwards contracts dropped 0.35 percent to 6.8155 yuan per dollar as of 5:30 p.m. in Shanghai, according to data compiled by Bloomberg. In the spot market, the currency was little changed at 6.8351, compared with 6.8350 yesterday, according to the China Foreign Exchange Trade System.

China has capped yuan appreciation since July 2008 as a global recession curbed demand for Chinese goods. Local demand is unlikely "to provide a full remedy for the sharp contraction in external demand," the commerce ministry said today. China’s money-market rate dropped for a second day after the biggest slide in consumer prices since 1999 spurred speculation the central bank will delay any monetary tightening.

A government report yesterday showed an index of prices in the economy declined 1.8 percent in July from a year earlier. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of lending in June, the central bank said yesterday. "The data prompted speculation China will stick to its loose monetary policy for quite some time," said Liu Junyu, a fixed-income analyst at China Merchants Bank Co., the country’s sixth-largest lender. "The money-market rate also dropped because of a temporary pause in big-stock IPO."

The benchmark seven-day repurchase rate, which measures funding availability in the interbank market, dropped four basis points to 1.51 percent. A basis point is 0.01 percentage point. China’s government bonds rose after yesterday’s data suggested an economic recovery will be delayed. Urban fixed-asset investment for the seven months to July 31 climbed 32.9 percent, the statistics bureau said. That was less than a 33.6 percent gain through June and the 34 percent median estimate in a Bloomberg News survey of 22 economists. The 1.8 percent decline in July consumer prices compared with forecast drop of 1.6 percent.

"The economic data, especially investment, fell short of our expectations," said Yang Yongguang, a fixed-income analyst with Guohai Securities Co. in Shenzhen. "The slower recovery may help boost bonds in the near term." The yield on the 2.22 percent note due July 2012 slid three basis points to 2.43 percent, and the price gained 0.07 per 100 yuan face amount to 99.43, according to quotes from the China Interbank Funding Center.

China’s stocks tumbled, with the Shanghai Composite Index entering a so-called correction, on concern a slump in exports and new loans will undermine the country’s economic recovery. The benchmark index fell 4.7 percent to a four-week low as the commerce ministry said China’s $4 trillion yuan ($585 billion) stimulus package can’t completely offset falling export demand. The gauge has lost 10 percent since reaching a 15-month high on Aug. 4 as banks reined in lending to avert asset bubbles.

"Investors have realized the recovery of the economy isn’t as solid as they had expected," said Wang Zheng, a fund manager at Jingxi Investment Management Co. in Shanghai. "Inflows into equities will slow down for the rest of the year as new lending growth eases." Jiangxi Copper Co., the nation’s biggest producer of the metal, plunged 7.4 percent after quadrupling this year, while PetroChina Co., the world’s most valuable company, slid 5 percent. China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, slipped 6.5 percent, a fifth day of declines.

The Shanghai Composite sank 152.01 to 3,112.72, its lowest close since July 13. The gauge has gained 71 percent this year as regulators loosened lending restrictions and the government implemented a stimulus package to revive the economy. The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, retreated 4.5 percent to 3,397.4. Domestic demand is unlikely "to provide a full remedy for the sharp contraction in external demand," the commerce ministry said in a statement today. Exports fell 23 percent from a year earlier, the government said yesterday, while urban fixed-asset investment rose a less-than-estimated 32.9 percent in the first seven months from a year earlier.

Jiangxi Copper, the 10th best performing stock on the Shanghai index this year, slumped 7.4 percent to 39.36 yuan. Aluminum Corp. of China Ltd., the country’s biggest producer of the metal, sank 7 percent to 16.27 yuan, capping a 17 percent plunge this month. PetroChina retreated 5 percent to 14.14 yuan. An index of materials producers sank 5.9 percent on the CSI 300, while energy stocks tumbled 5.4 percent. A gauge of six metals on the London Metal Exchange fell 2 percent yesterday and crude oil dropped 1.6 percent in New York to close below $70 for the first time this month. Zhuzhou Smelter Group Co., China’s biggest producer of refined zinc, lost 6 percent to 13.44 yuan after saying first- half profit dropped.

China’s new loans plunged to 355.9 billion yuan in July, less than a quarter of advances in June, official data yesterday showed. China Construction Bank Corp. President Zhang Jianguo said last week the world’s second-most valuable bank will cut new loans by 70 percent to avert a rise in bad debt. "The slowdown in new lending is an excuse for investors to exit a market that’s risen too fast and gotten too expensive," said Philippe Zhang, chief investment officer at AXA SPDB Investment Managers in Shanghai, which oversees about $220 million. Investors should sell China’s stocks as the market is in "bubble territory" and share prices already reflect expectations for a rebound in the economy and earnings, Shenyin & Wanguo Securities Co. said in a report yesterday.

China Cosco slid 6.5 percent to 16.06 yuan. China Shipping Development Co., a unit of the nation’s second-biggest sea-cargo group, lost 6.6 percent to 15.09 yuan. The Baltic Dry Index sank 2.5 percent, according to the Baltic Exchange, on speculation Chinese demand for iron ore may be weakening. Individual investors have rushed into equities as regulators lifted a nine-month moratorium on initial public offerings and the economy rebounded. Investors opened more than 660,000 accounts to trade stocks last week, data from the nation’s clearing house showed today, the second-highest amount since January 2008. Household savings fell in July for the first time since October 2007 probably because people withdrew money from banks to buy into IPOs, the Shanghai Securities News said today, citing Li Hongrong, an analyst at Ping An Securities Co.

China’s exports and new loans tumbled in July and industrial output rose less than estimates, underscoring government concern that the world’s third-biggest economy is yet to establish a solid recovery.Exports fell 23 percent from a year earlier, the customs bureau said. Industrial production gained 10.8 percent, the statistics bureau reported. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of June’s level, the central bank said.

China will maintain a "moderately loose" monetary policy and "proactive" fiscal stance to bolster domestic spending in the face of slumping exports, Premier Wen Jiabao said Aug. 9. New loans fell as the government and banks moved to avert bad debt and bubbles in stocks and property after a record $1.1 trillion of lending in the first half helped drive a 7.9 percent economic expansion in the second quarter. "There’s an element of fragility in the recovery," said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. "The government needs an appropriately loose monetary policy."

The yen rose against the euro and the dollar as investors sought safety because of the weaker-than-estimated output number and the export decline. The Shanghai Composite Index closed 0.5 percent higher, taking this year’s increase to 79 percent. Appliance manufacturer Qingdao Haier Co. and spirits maker Kweichow Moutai Co. climbed as the statistics bureau said retail sales rose 15.2 percent, more than estimates. China’s economy will grow 9.4 percent this year, topping the government’s 8 percent target, Goldman Sachs Group Inc. said yesterday. The credit boom and a 4 trillion yuan stimulus package helped General Motors Co. to report a 78 percent increase in vehicle sales in China in July.

Urban fixed-asset investment for the seven months to July 31 climbed 32.9 percent, the statistics bureau said. That was less than a 33.6 percent gain through June and the 34 percent median estimate in a survey of 22 economists. "The fixed-asset investment number is worrying because government-sponsored investment is a pillar of the recovery," said Tao Dong, chief Asia-Pacific economist at Credit Suisse AG in Hong Kong. "This set of data should postpone any thought of more aggressive tightening; the economy is slowing down a little bit."

Policy makers cautioned this month that a recovery is not yet on solid foundations and central bank Governor Zhou Xiaochuan said July 28 that the nation will take its cue from the U.S. on when to end economic rescue efforts. The Bank of Japan left its key lending rate unchanged today, citing "downside risks to economic activity" and South Korea held its benchmark at a record low, with Governor Lee Seong Tae saying a recovery faces "some uncertainties." The gain in industrial production in China compared with a 10.7 percent advance in June and economists’ median forecast for an 11.5 percent increase.

The export decline matched economists’ estimates and was the third biggest since China’s shipments began to shrink in November last year. China Shipping Container Lines Co., the country’s second-largest carrier of sea-cargo boxes, forecast last month a first-half loss on weaker global demand. Imports fell 14.9 percent, leaving a trade surplus of $10.63 billion. The industrial production figure suggested the economy "started the third quarter on a slightly softer tone," Ben Simpfendorfer, a Hong Kong-based economist for Royal Bank of Scotland Plc, said in a Bloomberg Television interview. "It’s a modest disappointment."

July’s new loans were the least since the government dropped quotas limiting lending in November last year and pressed banks to support a 4 trillion yuan stimulus package. None of 11 economists surveyed forecast such a low number. M2, the broadest measure of money supply, rose 28.4 percent. Loans growth was in keeping with the moderately-loose monetary policy, the state-run Xinhua News Agency quoted an unidentified central bank official as saying in a report on a government Web site. New loans are usually higher in the first half of the year and in March, June and September, the official said.

China Construction Bank Corp., the nation’s second-largest bank, will cut new lending by about 70 percent in the second half to avert a surge in bad debt, President Zhang Jianguo said last week. "We noticed that some loans didn’t go into the real economy," Zhang, 54, said in an Aug. 6 interview at the bank’s headquarters in Beijing. "I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast."

UBS AG said in a July 31 note that the scale of China’s new lending in the first half was "neither sustainable nor necessary." New loans of 300 billion yuan to 400 billion yuan a month in the second half would be "more than enough" to support the nation’s recovery, the report said. Consumer prices fell 1.8 percent last month from a year earlier, the biggest decline since 1999, the statistics bureau said today. They were unchanged from the previous month. Producer prices dropped a record 8.2 percent.

Some of America's biggest food companies say the U.S. could "virtually run out of sugar" if the Obama administration doesn't ease import restrictions amid soaring prices for the key commodity. In a letter to Agriculture Secretary Thomas Vilsack, the big brands -- including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. -- bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.

The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn't allow them to import more tariff-free sugar. Current import quotas limit the amount of tariff-free sugar the food companies can import in a given year, except from Mexico, suppressing supplies from major producers such as Brazil. While agricultural economists scoff at the notion of an America bereft of sugar, the food companies warn in their letter to Mr. Vilsack that, without freer access to cheaper imported sugar, "consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted."

Officials of many food companies -- several of which are enjoying rising profits this year despite the recession -- declined to comment on how much they might raise prices if they don't get their way in Washington. The letter is the latest salvo fired in a long-simmering dispute between U.S. food companies and the sugar industry over federal policy that artificially inflates the domestic price of U.S.-produced sugar in order to support the incomes of politically savvy sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South. Most years, the price food companies pay for U.S. sugar is twice the world level.

Ron Lucchesi, head of procurement for Gonnella Frozen Products in Chicago, which signed the letter, said current U.S. sugar policy distorts pricing. Though sugar accounts for only 0.5% of total costs at Gonnella, soaring sugar prices are "part of the equation" that already has led the company to raise prices for kaiser rolls, hamburgers and hot dogs, all of which include sugar. The issue is coming to a boil again because sugar prices, both in the U.S. and globally, have soared to unusually high levels for more than a year and show little sign of easing any time soon. Prices of sugar futures contracts have risen 95% so far this year, hitting a 28-year high in recent days. On Wednesday, raw-sugar futures jumped 4.8% to 22.97 cents a pound at the Intercontinental Exchange.

Prices are up because the world is consuming more sugar than farmers are producing. One big factor: The world's largest sugar producer, Brazil, is diverting huge amounts of its cane crop to making ethanol fuel. Likewise, the food industry has complained bitterly in recent years about the U.S. ethanol industry's ravenous appetite for corn, which helped push up prices for that key ingredient too. More than half of Brazil's sugar-cane crop is processed into ethanol while about one-third of the U.S. corn crop is made into the alternative fuel. An erratic monsoon season in India also has led sugar analysts to reduce their production forecasts for the world's second-largest sugar producer.

At the same time, U.S. sugar supplies are tight. In its monthly report on global farm markets released Wednesday, the Agriculture Department said it expects U.S. sugar supplies by September 2010 to drop 43% from this fall.According to USDA estimates, the food industry will import about 1.4 million tons of sugar under the tariff-rate quota system during the crop year that ends in late September. An economist for the Sweetener Users Association, a food-industry trade group, said Wednesday that food executives want to be able to import an additional 450,000 tons of tariff-free sugar by Sept. 30.

As a percent of input costs, sugar varies for food companies. It is about 1%, 8% and 6%, respectively, of the costs for ConAgra Foods Inc., Hershey and Kraft, according to a recent report by Barclays Capital analyst Andrew Lazar. It's far from clear whether the Obama administration will move to increase the flow of foreign sugar into the U.S. anytime soon. The Agriculture Department released a statement saying it will "continue to review market conditions to ensure...an appropriate safety net for growers" as well as "a stable supply environment."

Earlier this month, Agriculture Undersecretary Jim Miller told a sugar-industry gathering in Utah that he wouldn't rule out a quota increase in the future. However, such a move would probably be politically unpopular among sugar farmers, who have a big voice in Washington through Rep. Collin Peterson, the Minnesota Democrat who is chairman of the House Agriculture Committee. Mr. Peterson, whose district is home to many sugar-beet growers, couldn't immediately be reached for comment Wednesday.

Phillip Hayes, a spokesman for the American Sugar Alliance, a trade group of cane and sugar-beet farmers, said farmers are "absolutely opposed" to expanding the sugar-import quota in part because it would cause the prices received by U.S. growers to sink. Jack Roney, the alliance's chief economist, said food companies probably wouldn't pass along any savings to consumers from a widened import quota. But each one-cent drop in the price of sugar costs U.S. farmers about $160 million, he said. "We take offense at any notion of reducing producer prices for sugar having any benefit for consumers, because historically we've never seen any pass-through of lower commodity prices of ingredients," he said. "It really is a profit-increasing opportunity for user companies."

Some big brands aren't jumping into the sugar fight. The big U.S. beverage companies, for example, didn't sign the letter to Mr. Vilsack. Although Coca-Cola Co. and PepsiCo Inc. use sugar in their international beverage business, both companies generally rely on high-fructose corn syrup to sweeten drinks in the U.S., their biggest market. Coke, of Atlanta, said it hasn't yet felt the impact of the sugar price rise because of continuing hedges on commodities. PepsiCo, the Purchase, N.Y., food and beverage giant, declined to comment.

Slack demand for electricity across the U.S. is leading to some of the sharpest reductions in power prices in recent years, offering a break for consumers and businesses who just a year ago were getting crunched by massive electricity bills. On Friday, the nation's largest wholesale power market serving parts of 13 states east of the Rockies is expected to report that electricity demand fell 4.4% in the first half of the year. That helped to push down spot market prices by 40% during the first half of this year.

Wholesale electricity -- power furnished to utilities and other big energy users -- cost an average of $40 a megawatt hour in the region, down from $66.40 a year earlier. The price declines in this market, which extends from Delaware to Michigan, come on top of a 2.7% drop in energy use in 2008 over 2007. The falloff in demand represents a reversal of what has been one of the steadiest trends in business. For decades, the utility sector could rely on a gradual increase in electricity demand. In 45 of the past 58 years, year-over-year growth exceeded 2%. In fact, there only have been five years since 1950 in which electricity demand has dropped in absolute terms.

But this year is shaping up to have the sharpest falloff in more than half a century, and coming on top of declines in 2008, could be the first period of consecutive annual declines since at least 1950. Dramatic price reductions don't immediately mean lower power bills for all consumers. That's because many customers pay prices based on long-term contracts. But lower prices will have a softening effect over time. In California and Texas, a combination of cheap natural gas and lower industrial demand is putting pressure on prices.

In the Houston pricing zone, which has many power-gobbling refineries and chemical plants, the spot market price was $61.82 in June, versus $129.48 a megawatt hour a year earlier. Power demand in Texas is down 3.2% so far this year due to business contraction and reductions in employment which are causing many households to economize. Just a year ago, many businesses and residential customers were reeling from electricity prices on the spot market that had spiked to historic highs, driven by high fuel prices and hot summer weather. Some businesses curtailed their operations because electricity and natural gas were too pricey.

But the flagging economy has resulted in a slump in demand that has jolted some energy markets. American Electric Power Co. and Southern Co., for example, both reported double-digit drops in industrial electricity use for the past quarter. Meanwhile, natural gas, which strongly influences electricity prices, has fallen below $4 per million BTUs, or British thermal units. That's down from $12 at last year's peak. For many businesses, the cost of electricity represents one of the few bright spots in a dismal economy. Andy Morgan, president of Pickard China Inc. in Antioch, Ill., which makes fine china, figures his electricity cost is down 30% to 40%.

Last year, when everything was spiking, he looked at different options -- including negotiating a fixed-price contract for energy with a supplier. He says he held off and now he's happy he did. "We've definitely reaped savings," says Mr. Morgan, adding that "especially in a down economy, you'll take whatever you can get. That's one of the few blessings during this storm." Slowdowns at major industrial companies such as Alcoa Inc. help account for the decline in electricity usage this year. The recession and drop in consumer demand for products that contain aluminum has caused the company to idle 20% of its smelting capacity world-wide this year.

In the U.S. the company has cut production at smelters, which are traditionally big energy users, in New York, Tennessee and Texas. Kevin Lowery, a company spokesman, said he did not believe that Alcoa has saved much money thus far because the company primarily purchases electricity through 25- to 35-year contracts. Steel Dynamics Inc. is benefiting from lower pricing. The company operates five steel mills, with four purchasing electricity at spot market prices in Indiana, Virginia and West Virginia. The benefit, though, is smaller than it might be because the steelmaker is producing less steel this year.

"We're producing fewer tons, but every ton we produce we seek to minimize the costs and electricity is one of those," said Fred Warner, a company spokesman. Its mills are running at 50% capacity this year, down from 85% capacity last year. Some wonder whether the deregulated markets of the Eastern U.S., Midwest, Texas and California will be especially hard hit if demand comes roaring back. That's because utilities in these markets no longer are required to build new resources. It's left up to the power generators to determine when the market conditions are ripe.

"There's more supply than demand and prices are really low so it doesn't make sense to build anything," says John Shelk, president of the Electric Power Supply Association in Washington, D.C., a group that represents power generators. Many electricity markets throughout the country have implemented demand reduction programs that give consumers a further incentive to reduce power use. The 13-state PJM Interconnection market has been one of the most aggressive -- and has seen one of the steepest price drops.

A new report from the region's official market monitor found a strong correlation between falling prices and an increase in demand-reduction programs. In the PJM market, energy users can collect money through an auction process for pledging to cut energy use in future periods. In May, PJM conducted an auction to ensure it will have the resources it believes it will need in 2012-13. About 6% of the winning bids came from those who pledged to cut energy use by a total of 8,000 megawatts in that future period.

Nearly one million young people are out of work as British unemployment hits a 14-year high, new figures showed today. Official data revealed that youth unemployment has soared, with more than 700,000 18 to 24-year-olds and 206,000 16 to 17-year-olds jobless.

In the three months to June, the number of 16 to 17-year-olds in work dropped to only 28.6 per cent, from 34 per cent a year earlier. The employment rate for people aged 18 to 24 dropped to 59.8 per cent, from 64.1 per cent.The figures formed part of what economists described as a "ghastly" set of employment data, which showed that the jobless total had hit a 14-year high of 2.44 million and that the jobless rate had reached a 13-year-high of 7.8 per cent. Analysts and unions are particularly concerned about the outlook for hundreds of thousands of young people, warning that it was set to get worse as the latest crop of students left education only to find themselves unable to find work.

Brendan Barber, General Secretary of the TUC, said that the figures showed the desperate need for more help for young people. He said: "With over one in six young people out of work unemployment is at crisis level."The Government must do more to get people back into work, otherwise we risk losing another generation of young people to mass unemployment." The Prince's Trust has calculated that a young person lost a job almost every minute between March and May and alone. In the three months to June, the total number of jobless people surged by 220,000 to its highest level since 1995. The overall jobless rate, at 7.8 per cent, was the highest since December 1996. The figure was worse than analysts' forecast of 7.7 per cent. The number employed fell by a record 271,000.

The only glimmer of hope was in the number of people claiming benefit. That rose by 24,900 in the period, compared with an expected 28,000 rise. The number of jobless 16 to 17-year-olds rose by 7,000 in the quarter. The number of jobless 18 to 24-year-olds leapt by 46,000. The dire figures undermine a spate of more recent optimistic data that had suggested that Britain was firmly on track to exit the recession. Last month a survey found renewed expansion in the critical services sector for a second consecutive month, and mortgage data from bodies such as the Council for Mortgage Lenders has given hope of a pick-up in the battered property market.

Howard Archer, chief UK and European economist for IHS Insight, said that today's figures were "ghastly." He said: "Unemployment is a lagging indicator and the sharp economic contraction suffered between the second quarter of 2008 and the second quarter of 2009 will continue to weigh down on the labour market for an extended period. "Even if the economy does return to growth in the third quarter, we suspect unemployment will rise for the rest of this year and much, if not all, of 2010." In a recent doomsday scenario, the Centre for Economics and Business Research, the think-tank, said that unemployment could rise to nearly 4 million by the end of the recession.

Earlier today Lord Mandelson, the Business Secretary, conceded that unemployment levels are "unacceptable". However. he sought to defend Labour's record, saying that the steps that the Government had taken to help employers, combined with the Bank of England's quantitative easing programme and interest rate cuts, had considerably eased the situation, saving at least 500,000 jobs. Lord Mandelson claimed that the jobless toll would have been much higher if the Conservatives had been in power . The Business Secretary, currently in charge of the country while Gordon Brown takes a holiday, said: "One thing I and the Government know is that any such level of unemployment is unacceptable."

In an interview on BBC Radio 4's Today, Lord Mandelson said: "The question is, what is the Government doing about it and what would be the level of unemployment if the Government had not intervened in the economy in the way in which we have?" He said that £5 billion was being spent getting the jobless back into work. However, a report today by the Audit Commission, the public sector watchdog, warns that councils are not doing enough to help communities with the fallout of the recession. It says that Britain faces a surge in drug addiction, alcoholism and domestic violence as the second wave of the slump takes hold.

The pound continued to fall against the dollar today after the Bank of England said inflation could temporarily fall below 1 per cent amid a recession that has grown deeper than its Monetary Policy Committee (MPC) expected. Mervyn King, the Governor of the Bank of England, said that it "is more likely than not that later this year I will need to write a letter to the Chancellor to explain why inflation has fallen more than one percentage point below the target [of 2 per cent]".

Last month, the Bank said that inflation fell to an annual rate of 1.8 per cent in June, from 2.2 per cent in May, reaching its lowest level since September 2007. Inflation could stay below 2 per cent until at least the end of 2012, Mr King said today as he unveiled the Bank's Inflation Report. Mr King’s comments sent the sterling down from $1.6478 to $1.64, taking its decline to more than 2 per cent against the dollar since last Thursday, when the Bank announced plans to pump another £50 billion of newly created money into the system through its "quantitative easing" programme.

The Governor also said that Britain remained firmly in the grip of a long-lasting downturn. Mr King said: "The recession appears to be deeper than the MPC thought likely at the time of the May report ...nominal indicators remain weak and the adjustment of balance sheets has a long way to run." However, Mr King tempered the gloom with some more upbeat comments on the economic outlook. He said: "There are more encouraging signs looking ahead. Confidence has recovered somewhat from its collapse last autumn and strains in the financial system have eased."

He added: "It is likely that output stabilised in the middle of this year, and business surveys and other short-run indicators suggest that growth is more likely than not to resume over the next few quarters." The growing likelihood that any increase in the interest rate from its current record low of 0.5 per cent would be postponed to at least the second quarter of 2010, sent the FTSE 100 index of leading shares up by 7.76 points, or 0.62 per cent, to 1,264.99.Mr King said he was "surprised that people were surprised" by last Thursday’s decision to increase the quantitative easing programme to £175 billion, given the outlook for inflation. Officials took the decision "in order to avoid a period of perhaps quite protracted below-target inflation," Mr King said.

"We are determined to bring inflation back to the target and it’s that which led us to take action," he said, adding that the UK would find itself "in a difficult position for a long time to come." The Bank’s forecast that keeping the benchmark interest rate at 0.5 per cent until at least the end of 2012 would see inflation approach 2 per cent by the end of the period. However, raising the rate above 1 per cent in the second quarter, as many investors are expecting, would see inflation clearly missing that mark. "I don’t think it’s unrealistic to suppose that growth rates come back, but that doesn’t mean that as far as most people and most companies are concerned, the recession will feel as if it’s over," Mr King added.

Britain faces a surge in drug addiction, alcoholism and domestic violence as the second wave of the recession and rising unemployment take a grip, the leading public sector watchdog warns today. Councils are not doing enough to prepare their communities for the fallout as the impact of more business failures, bankruptcies and the soaring jobless toll leads to deepening social and human problems, the Audit Commission reports. The watchdog, which monitors the performance of local councils and services, says that most authorities already face extra demands for benefits, welfare and debt counselling.

One in three has extra pressure on social and mental health services, and on state school places from parents who can no longer afford to educate their children privately. Official figures today are expected to show unemployment among young people breaking the million mark. Some 30 per cent of 16 and 17-year-old school-leavers are unemployed, the highest level since records began in 1992. Overall unemployment is expected to have hit a 14-year high of 2.5 million in the three months to June.

The Audit Commission reports that Britain is still in the first phase of the recession, which it describes as economic, with output declining and companies failing. But the country is about to face the second, social phase, where growth returns but long-term unemployment triggers a range of housing, health and domestic problems. It says: "With families and individuals under stress, most areas are likely to witness increasing social problems including domestic violence, alcoholism, drug addiction and young people unable to find jobs. Councils may also have to deal with more fly-tipping, abandoned cars and stray dogs."

The report finds that while most councils have taken some steps to help local businesses and vulnerable families, the impact was likely to be "modest" and few were targeting their efforts effectively. It accuses councils in some areas, particularly those that have so far escaped the worst effects of the recession, of being complacent. Councils in the West Midlands, Yorkshire and the Humber had been hardest hit by the recession while those in the South West and eastern England had been least affected, it said. Those in deprived areas with experience of managing such problems had produced more ambitious action plans, which the commission said could be effective but were also risky.

The troubled Caisse de dépôt et placement du Québec, still reeling from a disastrous 2008, failed to find its footing the first half of this year, as risky commercial real estate loans and private equity investments led to more than $5-billion in writedowns at the provincial pension fund manager. The Caisse took the unprecedented move of announcing interim financial results Tuesday – indicating that an overall writedown of $5.7-billion on real estate and other investments completely wiped out gains on stocks in the first half of the year – in part to quell growing rumours about trouble in its property portfolio.

The Caisse, which manages the assets of 25 provincial funds including the Quebec Pension Plan, was stung by criticism last fall that it was too secretive, when it continuously rejected calls to reveal the extent of the damage it suffered as a result of October's stock market meltdown. Tuesday, the fund manager's new chief executive officer Michael Sabia signalled that the era of secrecy has passed, as he unveiled as major retrenchment at the real estate unit and an unwinding of the risky property investment strategies pursued under his predecessor, Henri-Paul Rousseau.

Those strategies bet on so-called mezzanine loans, essentially second and third mortgages on U.S. office buildings, on the assumption that commercial property values would continue to rise. The loans were riskier than conventional, secured mortgages, but carried much higher interest rates and produced strong returns for several years. The Caisse was badly bruised in 2008 by its oversized position in currency and futures contracts and third-party asset-backed commercial paper holdings, posting a $40-billion loss last year, equal to a return of minus 25 per cent. The ABCP exposure caused a further writedown of $400-million in the first six months of this year, the Caisse said Tuesday. Private equity and infrastructure investments caused a $1.3-billion hit, with most of that coming from its troubled investment in British Airports Authority (BAA).

But the majority of the Caisse's pain so far this year stems from real estate, which accounted for 71 per cent of its writedowns. And the first-half real estate losses are on top of the negative 22-per-cent return the property portfolio yielded in 2008. The writedowns this year erased the 5-per-cent return that the Caisse had earned on other investments to June 30, leaving it with "neutral" overall performance, Mr. Sabia said. "No one here thinks that neutral returns is what we should be aiming for," he told reporters on a conference call. "There's a lot of work to do in repositioning the Caisse and changing our strategies, and we're going to continue to do that."

Mr. Sabia has shaken up the real estate group's management team, and the pension fund will stop investing in the higher-risk mezzanine loans and other forms of subordinate real estate loans. The Caisse will also fold its Cadim division, which invests in multiresidential properties and hotels, into its office building subsidiary. The rush into riskier commercial real estate lending intensified under Mr. Rousseau and his lieutenant Richard Guay, reflecting a risk management strategy that placed enormous faith in the protection offered by asset allocation. The theory was that the Caisse could hold riskier assets in many different categories without danger, since not all asset classes would collapse at the same time.

The market meltdown last fall put the lie to that idea. And by this spring, it was clear that commercial real estate was becoming the next asset class to crater. Earlier this year, the Caisse was forced to buy a New York office building on which it held low-ranking mortgage of $130-million (U.S.) after the building's owner, Macklowe Properties, went into default. Had it not bought the building for a nominal sum of $100,000, the property would have gone into foreclosure and the Caisse would have had to realize a loss on the entire value of its mortgage. Another sign of trouble in the real estate unit emerged last month when the head of Cadim, the Caisse division responsible for the property mortgages, suddenly left the pension fund manager. No reason was given for Richard Dansereau's departure at the time.

Mr. Sabia said the Caisse still has strong real estate subsidiaries. "When I look at Ivanhoe Cambridge and SITQ, the quality of the operations, the size of these companies in the global framework of the real estate business over all, these are major, major companies that perform at a very high level with respect to operations." The restructuring will help the real estate businesses weather the challenges in the U.S. real estate market, he said. The Caisse's writedowns are paper losses based on mark-to-market accounting rules, which require the plan to ratchet down the value of its assets to what they would fetch in the market today. Mr. Sabia said he expects the market for hard-to-sell assets to remain difficult, given continuing weakness in the global economy.

The Caisse is the country's largest pension fund manager. Deborah Allan, a spokeswoman for Ontario Teachers' Pension Plan, declined to comment on Mr. Sabia's decision to boost transparency at the Caisse but said "we do not have any plans to report more frequently than annually."

163 comments:

Call it "The Ruby Slipper Recovery." This wishful thinking reminds me of the scene near the end of "The Wizard of Oz" when Dorothy clicks her ruby slippers together three times and says dreamily "There's no place like home." It's like these 47 + 53 are opining "There's no place like recovery..."

One thing that is startling everytime I read it,is the statement that,'unemployment is a lagging indicator'. That might be the case in an inventory led recession but in a credit driven one it's a leading indicator IMO. As Steve Keen has shown there is a very close correlation between deleveraging and unemployment.As the economy delevers faster,unemployment will increase. So far deleveraging has barely been allowed to occur and see the mess we have. At some point every household in America and the OECD will be underwater! The government is doing the best it can to prevent deleveraging, it has bought some time but the reality is horrid. Those 47+53 will never be held accountable for their false predictions,shame really. The same models that didn't predict this crisis are now predicting it's end. Irony.

Despite the fact that Hugh Hendry may be the only likable hedge fund operator on the planet and is undoubtedly very bright, there are dangers in your/his plan as well. Both KD and Stoneleigh are predicting a Treasury dislocation, though KD is predicting it far earlier than Stoneleigh. If one gets caught with 10 or 30 year bonds when it hits, you'd be lucky (in the 30 year case) to get 20 cents on the dollar. Every strategy has its risk.

As to inverse ETF risk. I noted last September that the ProShares inverse funds were effected far less negatively by the shorting ban than one would expect. They didn't dissolve like the wicked witch of the west instantly. They actually increased in value toward the end of the ban as the market further sank.

Yes, there are risks that both ProShares and/or your discount broker could go belly up and leave you high and dry. I am reminded of Slim Pickens' fateful last ride down on a H-bomb waving his ten gallon hat at the end of Dr. Strangelove (perhaps Peter Sellers most brilliant role). One must not be too greedy and bail out before ignition. I have been thinking a lot about this point. And then there are risks getting your money from the broker to the bank, and then the weekly auction for 13 week treasuries. All the more reason not to wave your ten gallon hat all the way to the ground.

@ El g, I personally doubt a bond market dislocation is imminent. When the market tanks, a flight to safety will take place. A repeat of last year but on a bigger scale! 10 yr and 30 yr yields went really really low and I expect the same this year. Bull market's end with big bangs as Hendry says. Think of 10years trading at 1% yield or less ;-) People will crave at the end of this year anything with the imprint, "USA" and "In God We Trust". Amen. Another possible play is the currency play,short AUD,NZD,EURO,CAD. Long USD,YEN and Swiss Franc as well as short oil futures and other commodities.

Some thoughts, the obvious risks associated with holding physical cash are the increased likelihood of theft and losing it in a fire or flood etc. The risks with holding short term treasury bills is the fact that your bank needs to survive the crisis, as well as the internet (possibility of a cyber war or lack of money to keep it running). Provided your bank and internet survive, the government could default on the long term debt and push the short term debt to long term. Provided this does not occur,you still need to convert your t-bill holdings to physical cash to pay for stuff. Obtaining physical cash at a time of hoarding and fear might be really difficult for the bank. Unless treasury bill certificates can be used as cash. Also precious metals have the obvious flaw of being tough to carry around. You're not going to lug around bars of gold. Where would you store PM's and why wouldn't it be confiscated?

Check out Mish this morning. Mr. Practical has moved back to the USA. The USD is the place to be right now. Both he and Mish see the USD strengthening, though Mr. P, like Stoneleigh, sees a hyper-inflationary collapse when delevering is complete.

Re taxing the pissants

Yes, one must pay special attention to exactly how they intend to go about this. Since the states cannot print money, so they must be the first to move. States will boost income tax and user fees. Cities will boost property taxes, just what underwater homeowners need. It should drop rents though, as landlord will not be able to afford vacancies with high real estate taxes.

The Fed can boost income tax bracket numbers or impose a VAT or both.

The good news about 13 week treasuries is that they may go negative, thus reducing your income taxes. They went negative in the secondary market last years for a couple of days. However, paying Geithner to hold your money safe is morally offensive.

To the best of my knowledge, the US Treasury no longer issues bond certificates. Perhaps someone with more knowledge can weigh in on this. You certainly get no paper with Treasury Direct. As to your bank going under, you can change or add to your original corresponding bank. This requires a bit more obstruction than assigning the original bank, but this is for your protection. To add to your bank list, you must submit a statement from a notary at the new bank. If someone steals your codes, they can screw up your account but they can't move the money out without personally presenting false ID to a bank notary.

As to fcuking around with time rates, this will automatically trigger a dislocation. Who wants to put money in Treasuries if they can change the terms mid-stream. One would look to other sovereign treasuries like Germany or Japan, who are not doing this.

I don't think governments will confiscate silver. Too much of a hassle. Might need a couple of donkeys to move your stash around though. I figured the other day that $10k weighs about 22 KG. May come back to St. John in a few years and start exporting the wild donkeys via friends' sailboats to the mainland. This is assuming they haven't been eaten by then. They will eat the freaken feral goats who have taken over the island first. I expect the territorial government to repeal the Donkey Emancipation Act shortly, re-enslaving our four legged friends :-)

@El G, What? No paper authentication for t-bills? Wow! If the avg usaco is not going to be able to afford oil products in less then 5 years,then by implication that means the internet is a lost cause. That's what worries me,how do you carry out transactions from your treasury account minus the internet,a personal meeting with Timmy? Or how does one purchase overseas t-bills minus the internet. What sort of system is in place I wonder for this eventuality? Even the possibility of cyber warfare carried out by disenfranchised hackers can't be discounted. Once the chinese economy fully blows up, I suspect a lot of anger will be directed to the US,Japan and Europe - from China with love via DNS?

Aug. 13 (Bloomberg) -- An accountant who has publicly blamed imprisoned con man Bernard Madoff for stealing her family’s savings has written a book that will disclose a secret she previously withheld -- they once had an extramarital affair.

Bernie screwed her both literally and figuratively. I guess he should get some sort of money manager award for this. May be a trifecta to be announced yet. (To you Canadians, that would be a hat trick).

So what percentage of the general populace buying into the fascist line is required to implement draconian policies? The Patiot Act laid some fine groundwork, but thus far it has been used to breach US citizens rights infrequently and not in egregious ways. OK, that last sentence is open to very wide interpretation. I guess I'm not aware of many indefinate detentions of US citizens etc. How much buy in do the fascists need in order to turn the pecking at the periphery of Rights into whole-sale gutting of average citizens' lives?

Unfortunately that kind of take-over by totalitarian forces is easier than one might think, especially if those forces are grounded in religious fundamentalism and are able to capitalize on a widespread state of traumatic upheaval. What we are facing will certainly qualify.

We are going to fall almost inconceivably hard over the next couple of years and I can readily imagine a message about the sins of man and the need to punish the materialists finding fertile soil. Unfortunately 'materialist' won't necessarily just mean consumerist, but quite possibly those whose reality is grounded in the material world of logic and the five senses, as opposed to the 'spiritual world'.

I had a brush with this kind of magical thinking when I spent some time in the company of a group of anthroposophists (followers of Rudolph Steiner) who ran the local Waldorf school where I taught for a year. We were reading a Steiner lecture on the nervous system. It was full of errors, as one would expect since it was written some 80 years earlier. I tried, in a constructive spirit, to point these out, so that the discussion could be based on the latest knowledge. What I got were pitying looks and an explanation that I needed to look beyond materialism (ie science).

I eventually realized that, as anthroposophy is a religion and Steiner is a prophet on the scale of Jesus to them, his words were regarded as Absolute Truth. They explained it by saying that he had access to the 'Akashic Record' of eternal truth. Any knowledge or interpretation contradicting Steiner is therefore wrong by definition in their eyes.

Needless to say, I didn't spend very long there, as I am not a fan of cults. It was a very eye-opening look into that mindset though, and as such a valuable educational experience, albeit not in the manner they intended.

My worry is that science, logic and rationality could be demonized in a wholesale conversion to magical thinking, and that thought frightens me more than anything else.

Denninger is going under a startling transformation. He started as a blogger that identified our financial situation, but thought we only needed to clean out the corruption to bring things back to how they were.

More and more you can see in his writings that he lost faith in that. He now sees we will never go back to past prosperity. Energy problems are also starting to take hold of his long term outlook. Once he realizes our 10 to 15 year outlook, he’ll ask Illargi and Stoneleigh if he can be a regular contributor to Automatic Earth.

LOL - I don't think so. He seems to think we're some kind of enemies of state. He said, when asked if we shouldn't be allies because our messages are similar, that he would never ally himself with those who sought the downfall of the US. I have no idea where he got that idea, as we have never written anything of the kind and harbour no such notions.

I would love to get Ilargi and Stoneleigh's take on the FOMC statement today, especially concerning the potential cessation of quantitative easing. I for one think, cessation of quantitative easing is the better path. No more bullcrap dollar debasement.

Of course, the question now becomes what happens to the taxpayer? Without printing, Joe 6 Pack becomes responsible for paying down the debt that cannot be repaid. This is where things start to get bad, because spending is going to be getting slashed and taxes are going to go way up. European level taxes, but without any benefit obtained for paying those taxes.

The bond market is still in charge and won't allow indiscriminate 'printing'. I don't see dollar debasement coming, I see very substantial dollar strength as deflation takes hold. I do see spending being slashed and taxes going way up, at all levels of government, as the centres at various scales attempt to survive by sucking the periphery dry. Services and entitlements will mostly disappear at the same time. The erstwhile middle class will be ruined.

"With families and individuals under stress, most areas are likely to witness increasing social problems including domestic violence, alcoholism, drug addiction and young people unable to find jobs. Councils may also have to deal with more fly-tipping, abandoned cars and stray dogs."

The toll this is taking on the social fabric (and all sentient beings) is rarely discussed anywhere in the MSM or even most blogs.

Already, daily I find abandoned cats and dogs that come to my house to seek refuge :( Luckily I have a friend who helps me and we do what we can. This whole tragedy of real suffering is beginning to be seen and felt all over.

Stoneleigh

"My worry is that science, logic and rationality could be demonized in a wholesale conversion to magical thinking, and that thought frightens me more than anything else."

Your intelligence, perception and flawless logic is a gift to your readers.

I wonder how soon we'll have the proverbial book-burning emperor who thinks knowledge is dangerous and all the computers need to be smashed ...

Unfortunately this is all too plausible, although not imminent. Think of the destruction of books and the beatings of intellectuals during the Cultural Revolution, or the extermination of intellectuals in the Killings Fields or the burning of the library at Alexandria (on the grounds that if they disagreed with the Koran they were heretical and if they agreed they were redundant). These things have happened many times before and in many different places in human history.

Your description of the faci-religious mind is on the same page as my comments yesterday.The willingness of such to mold their "reality" to whatever their Philosophy requires is what I find deeply disturbing.Willing sheep,or good soldiers...or informants to the local authority...all are within the bounds of reason to this mindset.Rational disagreement,and discourse are a anathema .{but I am right because my faith SAYS I am right...and you are a evil ,wicked,non-believer who will rot in the lake of fire forever!!}

...Ick..

I understand these folks too well.This is why I have a deep and abiding fear of them ...Remember well the worst atrocities in history have been visited upon "unbelievers"of one sort or another...

Mr Taleb is concise,and on the money.When he becomes a bull is when I will think of investing in anything besides the "Bank of the Green Sock".I think he would make a fine dinner guest,and provide insights that most never imagine of the world of finance...

What little "liquidity"I have is in silver.I have made most of my investments in bees and fruit trees,not something you can haul on your back.I have always felt that the "shelter in place"mode of disaster preparedness is the best in my circumstance.When you leave your home/ shelter you become a refugee...part of a group that has historically been on the receiving end of a lot of pain & suffering...

VK said: Where would you store PM's and why wouldn't it be confiscated?

I don't worry about physical gold being confiscated. Too hard to do in the physical world. How does a government assign "X" number of agents to go to "Y" locations in "Z" days to snatch stuff without the rightful owners getting there first and heading for the hills? People are not as inclined as they were in FDR's day to obediently follow government dictates on grounds of patriotism -- especially the paranoid sorts who buy and store physical gold.

What would be simpler is for the government to decree that "The price of gold is X dollars per ounce. It is illegal to sell it for more than that, or we will charge a 90% tax on the excess."

With a media campaign to demonise people who hold gold -- easy to sell to the goldless sheeple -- such a law could pass. (Might gore the oxes of the rich, but they could hold out for a decade until they get the law changed back.) If the world financial situation is bad enough that gold wealth needs to be sweated out of the system, this could be done in many countries simutaneously. Look at how well the Bank for International Settlements coordinates crackdown activities.

No messy physical confiscation that way. Anyone who buys or sells gold outside the legal channels becomes a financial criminal. Who's going to take a chance of selling gold for the true market price on the black market? You'd be limited to dealing with Mafia types or other criminals. You want to rock up with gold coins in your hand when the person across the table from you is a crim?

To those who think that gold might be a safe haven, keep in mind that nothing is necessarily immune from the long paw of the "law."

Britain's Uber-bear is growling again. After predicting a torrid "relief rally" over the early summer, Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears.

"We are now in the middle of a parabolic spike up," he said in his latest confidential note to clients.

"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets."

The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice.He expects global stock markets to test their March lows, and probably worse.

The slide could last three months. "A move to new lows is highly likely," he said.

I doubt it (the internet) will go "poof" overnight. There are already those who want us to pay per packet, so that is inevitable.

K, did you read the story in the New York Times two months ago about "the cloud" of the Internet? It detailed the nuts 'n' bolts of the server farms where all these images we're reading actually reside. Row upon row of massive storage machines, buildings all over the world, kept alive by air conditioners that keep the computer brains from overheating, with their own diesel power sources humming in case there's a hiccup in the power grid.

All of this stuff is corporate controlled. We get it all for free, for now. We can click on a link from long ago, like TAE's primers, and there it is! That would be SO easy to stop, by government dictate or corporate bankruptcy. All that some power would need to do is cut the power, and -- POOF! there goes your Internet.

That's also why it doesn't matter what us goats do, Greenpa. There's just a few of us, in terms of the big picture. We matter not -- just a few strays from the herd. And our chatter can be squelched, bloodlessly, if and when it needs be.

Sales at U.S. stores open at least a year fell 1.2 percent after the retailer had forecast them to remain little changed or rise as much as 3 percent. The cost of sales declined 2.5 percent to $75.2 million.

The drop was attributable to consumers’ being “more selective” in buying discretionary items and to stronger deflation in grocery prices than expected, Eduardo Castro- Wright, Walmart’s U.S. stores chief, said on the call. Walmart also underestimated the positive impact of last year’s U.S. tax- rebate checks on year-earlier sales, he said.

:O

The media is positively loving the French and German positive GDP numbers, conveniently forgetting the rise in Government spending and fall in imports. Lovely! :)

I'm sorry but I can't bring myself to respect anyone who doesn't show respect to those whose opinions may differ from theirs. What a sad and lonely life you must lead as the only pure one here. I would love to have only a tenth of your certainty. :-) I cheerful flip of the bird to you too chickie! :-) How surprising to find a Vegan Dominionist here on TAE. Yours is obviously the only way. :-)

To our wonderful hosts and others, Sorry if this post bothers you, needed to vent as I AM NOT PERFECT!"

Gee, how sad that my questioning and condemning US militarism and military service provoked such a series of ad hominems.

Spice, perhaps you are not outside of the so-called herd as you might think. Please do us a favor and direct your venting at self-examination, and then you might start questioning military service and your daily diet.

Unfortunately, even among readers of TAE, where the abuses and crimes of the ruling elites are constantly being exposed and discussed, one finds individuals intolerant of criticism directed at US militarism and those who serve in the military. Let's not deny that without the imperial US military the crimes perpetrated by Wall St. (GS) at home and the IMF abroad, for example, would not be possible.

@Taizui I need help understanding the mechanism by which the price of 10/30yr Treasuries "soars" in this scenario. And would I use Treasury Direct for all the transactions?

If you hold a bond that pays 2% interest and current interest rates decrease to 1% your bond is now worth more. So a new shock (stock market, derivatives, etc) resumes the vaunted “flight to safety” to US Treasuries and demand for Treasuries increases, this allows new bonds to pay less interest. Again the bond you hold that pays more interest is now worth more. This sensitivity to changing interest rates is especially pronounced in 30 year bonds. This “flight to safety” is an emotional herding, not rational reaction. The trick to this is to sell your bonds for a greater price than you paid AND do it before interest rates increase (the mass of bond owners decide they want to sell or the supply of new bonds is greater than demand). Hope I understood the question.

Stoneleigh sounds certain that the “flight to safety” will resume, however not if the rest of the world dumps their US Treasuries first. It is possible the Chinese have taken steps to hedge their holdings of US debt so if bonds sink in price they are compensated. In the same way swap contracts allow money to be made destroying a victim company’s stock or bond prices. China, Japan and private accounts in the Caribbean own most of the US debt. It is all a matter of how much the world has to gain or loose continuing to buy US Treasury offerings. The US could try a great big beggar-thy-neighbor and devalue the dollar, gaining advantage against other currencies at the rest of the world’s expense. I don’t know the future, Stoneleigh is probably right however, “flight to safety” first.

Rick Ackerman gives a somewhat different viewpoint on the unfolding denouement in the S&P 500 over the next several months:

. . . “thinking” about this market is not necessarily the best way to understand it, since the uptrend seems to be driven not by rational thinking, but by the wantonly mindless flight of Other People’s Money into equity shares. For that reason, we have purged nearly all of the “thinking” from our analysis, the better to focus on the coldly mechanical facts that technical analysis affords.

Which brings us to the chart above. It shows how the S&P 500 Index would look on a weekly chart if it were to fall quite sharply, losing about 25 percent of its value over the next four months. Permabears - and we unapologetically include ourselves in that group — would probably get pretty excited about this, since it would suggest that stocks were at long last responding to events in the real world — most particularly to a debt deflation that threatens to wreck capitalism for at least a generation. In purely technical terms, a 25 percent pullback within the massive bear rally would feel right as rain, since it would fully correct the very powerful AB “impulse leg’ shown in the chart.

. . .

We have tacked on to the end of the chart one final, highly lethal bear trap, since that would be a fitting end to the Mother of All Bear Rallies. Once again, this is not exactly what we expect, since we are too bearish to think that a big selloff beginning around now would actually reverse before stocks plunge into the bowels of Hell. Even so, since thinking is not what we do best, we have drawn a chart with hypothetical price bars to remind ourselves that what does not seem logically possible can become quite plausible and even compelling in a purely visual, imagined sense.

Bears and bulls alike therefore have good reasons to be extremely cautious, especially when it looks like they might be getting what they wished for.

"According to the following, Prechter says that oil will fall to between $4 and $10 and won't recover for decades. Is he accounting for peak oil?"

Given this week's acknowledgement by OPEC that quotas are being broken and production is higher than "desired", as well as the renewed focus on storage in tankers, you do have to wonder whether peak oil is an issue to begin with, and if it is, what it means today and going forward.

As we have been saying all along, we see a credit shortage before an oil shortage. Events so far pan that out. You'll have no spending power to buy oil before there's no more oil to buy.

I agree with Prechter's price prediction, something that's not new for long time readers here, for that very reason. Whether it will go down to $4 or $20 depends on many external factors, and it's not the most interesting issue at hand.

The IEA issued a report yesterday that confirms the slowdown in demand, on the heels of OPEC's supply glut admission.

The reasons for the oil price to be where it is despite these developments is I think twofold. There are large parties who've been heavily invested in it ever since the latest lows were reached, arguing it can only go up from there, which to date has been more or less a self-fulfilling notion. And then there is an increasing number of people who ride the happy talk train, who feel assured the recovery will drive oil up and the dollar down.

It is, by the way, as tricky as it is silly to only look at oil priced in dollars. As soon as the dollar goes down vs other currencies, Americans claim oil goes up. Which may be true for them, but is not necessarily so for other countries.

The family and I just took a short trip up the coast to Santa Barbara and the Santa Inez Valley (central Cali coats wine country). For early August, I was surprised at how really empty the beach & the shopping districts were. Storefronts empty, commercial RE developments stopped in their tracks, major corporate restaurants that have closed down locations...etc. Indeed the vast majority of people on the streets and in those restaurants in the tourist centers were Europeans (taking advantage of the cheap dollar no doubt). We stayed in a very nice hotel, it was mostly empty.

Two years ago, you had trouble getting a room in a motel 6 for $180 a night!

There is no recovery, the 115 million household economy that Elizabeth Warren mentions is in a meat grinder... Main street is in a deep depression on the left coast ... The yapper's on TV and in Washington will find themselves in a full blown crisis of faith very soon (anger at health reform only the latest symptom)

Don't ignore the effects of the finance crisis on the oil producers, which urge them on to make up for losses by increased production. They may look rich, but the more you have, the more you have to lose. Prince Alwaleed, for instance, with his huge share of Citi, has lost many billions.

"Prince Alwaleed, for instance, with his huge share of Citi, has lost many billions."

Yes indeed, and he lost much of his Citi investment value as I understand it. Point well taken.

I am thinking his political considerations weigh on him nearly or perhaps even more so than his personal wealth. Having spent a lot of time here including his California college stint I imagine he has a rather broad view of how to keep himself solvent--and in power.

Let us get some facts straight because English and American history books write lots of rubbish about the Middle East - they write what their readers would like to be the truth rather than what actually happened.

Another favourite example is that the Jews built the pyramids - I was taught that at school in the UK when I was 10. I protested but my teacher thought that she knew better since it was in the history book. In reality, the Jews came to Egypt thousands of years after the pyramids were built.

In a similar vein, in the last couple of days, we have had assertions as to the unlikelihood of the US military misbehaving against the US populace.

All I can say here is that they have misbehaved abominably in the Middle East over the past 30 years and anyone who thinks that they would behave better when they are ordered against US citizenry is delusional. It is a mindset thing.

I am sure that you are aware that the Lancet estimated Iraqi civilian losses in the hundreds of thousands. This survey excluded those killed by the UN embargoes and the preceding war. The invasion of Iran by Iraq was encouraged and financed by the West - over a million died there.

Personally, I met an American mercenary helicopter pilot in Paris who at that time was quite proud of working for Sadam Hussein - the US government provided his services. He said that his helicopter was armed and maintained by French technicians. He would come to Paris every few weeks for R&R. Guys like this would have no problem using a Gatling gun against US civilians if the money was there.

Ilargi said...Whether it will go down to $4 or $20 depends on many external factors, and it's not the most interesting issue at hand.------- Wow!Imagine if you have a tanker full of oil and expecting to make a huge profit from having bought at a low price. There are monthly cost for storage.

Something tells me that those big players are going to make money before the market goes to below their cost of acquisition.

While I agree with Mr Prechter that oil will fall substantially in the next leg of the decline, I disagree with his longer term forecast that the price will remain low. Mr Prechter is not an energy specialist and does not accept the possibility of an oil production peak, following a discovery peak decades ago. He would say that peak oil is merely an alarmist notion reflecting the generalized fear of a bear market.

IMO energy is his major blind spot. I don't think he realizes that it is the master resource, and that access to it determines hegemonic power. We are heading into an era of resource wars, where military demand for oil will be insatiable, and much of both the oil and its supporting infrastructure risks being destroyed or rendered inaccessible in the process of fighting over it. His own forecasts predict international conflict, so I find it strange that he does not appear to think through the implications of this in relation to energy.

My general view of energy matters can be found in the primer Energy, Finance and Hegemonic Power. I think, as Mr Prechter does, that oil and gas prices will initially fall with demand collapse, I also think this will set up supply collapse conditions that should send oil prices soaring further down the line.

Oil would be much less affordable in the future even at a lower price than today, as purchasing power will be falling more quickly than price. If oil prices skyrocket eventually, as I expect, oil would be, for all practical purposes, completely unaffordable by ordinary people. IMO access to energy, even enough for the most basic functions, will be a huge problem down the line. People seriously need to think through their energy dependencies and reduce them wherever possible, without going into debt to do so (which I realize is much easier said than done).

I don't have a clear time horizon in my mind for how long oil prices might remain depressed before rebounding. My standing forecasts are that oil is likely to bottom relatively early in this depression, and that ordinary people will be unable to afford oil products within five years.

Prince Alwaleed, for instance, with his huge share of Citi, has lost many billions.

Prince Alwaleed bin Talal is notorious for buying into trends at the worst possible time. I strongly suggest using him as a contrarian indicator. If you do the opposite of what he does, you will be right more often than not.

Nassim - I agree with this 100% "All I can say here is that they have misbehaved abominably in the Middle East over the past 30 years..."

However on this "...anyone who thinks that they would behave better when they are ordered against US citizenry is delusional.." I think it is a worst case scenario, a potential but really I am not of the opinion that it will happen. My view has nothing to do with Americans or Arabs or any sect. I just think we are going to wind down in such a manner that major violent fascist activity will be avoided. But your point about U.S. record in the Mid East is VERY well taken.

StoneLady - "IMO energy is his major blind spot. I don't think he realizes that it is the master resource, and that access to it determines hegemonic power."

Yes. And the blinders are coming off more and more folks daily. The debt crisis and energy are a catch 22.

The thing is, people are smarter than this... Even my most right slanted neighbors don't buy into this simplistic propaganda. She has about as much political potential as my dog... (I don't have a dog)

The RNC are not that stupid and I imagine Mr. McCain is blushing in shame at the moment!

“Market bounces are hard beasts to figure, although they do seem to have some logical turning points. For example, a 38.2% retracement or a 50% retracement in the 'bounce' is often observed, although in extremes, the bounce can be 80% or more.

The price of oil, in the immediate future, will be determined by those having oil tankers full of oil.

Those supplies must be sold at above their cost of acquisition. I'm sure that those big players have enough clout to keep the prices high. Of course there are many other who find it convenient to have the price of oil at + $70.

We have seen the financial markets being manipulated, ... those same players can and will be able to manipulate the price of oil irregardless of the supply/demand.jal

A glance at a map and a little knowledge of the region suggest that the real reasons for Western military involvement may be largely hidden.

Afghanistan is adjacent to Middle Eastern countries that are rich in oil and natural gas. And though Afghanistan may have little petroleum itself, it borders both Iran and Turkmenistan, countries with the second and third largest natural gas reserves in the world. (Russia is first.)

Turkmenistan is the country nobody talks about. Its huge reserves of natural gas can only get to market through pipelines. Until 1991, it was part of the Soviet Union and its gas flowed only north through Soviet pipelines. Now the Russians plan a new pipeline north. The Chinese are building a new pipeline east. The U.S. is pushing for "multiple oil and gas export routes." High-level Russian, Chinese and American delegations visit Turkmenistan frequently to discuss energy. The U.S. even has a special envoy for Eurasian energy diplomacy.

Rivalry for pipeline routes and energy resources reflects competition for power and control in the region. Pipelines are important today in the same way that railway building was important in the 19th century. They connect trading partners and influence the regional balance of power. Afghanistan is a strategic piece of real estate in the geopolitical struggle for power and dominance in the region.

You left out scenario number three. A US / Israeli attack on Iran. Iran then shuts down the Persian gulf to oil tankers. The US military makes a spectacularly unsuccessful (intentional) attempt to counter the shut down resulting in the fiery destruction of several tankers. The big oil companies then state that they can't risk losing any more tankers. Crude goes to $200-300 a barrel. The western governments blame the mullahs for forcing us to attack them and thus delivering the coup de grace to western economies. So the Greatest Depression is the fault of the Iranian mullahs.

The only explanations for the stockpiling of crude in supertankers at sea are that Da Boyz are exceedingly stupid and uninformed or the Iranian attack is a done deal and in the can.

Also

The inside knowledge is that Satan himself is CEO of the Bank of International Settlements so its goals and activities can not be view from normal human perspective.

Greenpa

In that great interview with Gerald Cilenti which VK linked two days ago, Cilenti said that a revolution (or an attempted one) is coming in the USA and the only peaceful way it could happen is through a third party which he labeled the Progressive Libertarian party. I regard this web site as the foremost vanguard of the Progressive Libertarian movement, and was more than surprised to find it. But as our troll attack last week would indicated, Libertarians are too interested in making sure than starving infants never get a free lunch to think in progressive terms, so I am not hopeful despite Cilenti's rather stellar prophetic track record.

There is no commercial market for goats here do to USDA red tape. Some West Indians do slaughter them occasionally but only for themselves. As to slaughtering donkeys, times have been plush here and most of the people rather buy their meat in the markets. I don't think the idea of eating the donkeys ever occurred to the locals under 50. If you keep enough goats on your land, you become a farm rather than a villa and it slashes your property taxes. I had a male goat whose mother abandoned him at a few days, and we had to bottle feed him. We named him Billy the Kid. I gave him to a guy as a stud to build a herd to lower his real estate taxes.

As to the Goat Party, male goats really smell bad. Maybe it's better to live the stink to the Republicrats.

IMHO, the armchair strategists took a look at the map and decided that Afghanistan, being in the middle, must be the shortest pipeline route. I sometime think that this idea that a straight line is the shortest distance between two points is a bit misleading. No one will ever be able to get pipelines that function dependably across Afghanistan - ever.

The British are gradually coming around to this understanding on the ground - but not their armchair generals and journalists.

For example, these past few weeks we have had a good number of articles in the papers explaining how the troops left Iraq "with honour". Obviously, they learnt nothing.

A doctor friend with the military came by a few weeks ago and I told him that it was a matter of time before the "Taleban" (let's call all opposition Taliban shall we?) will work out that they can also make drones that can drop from the sky on to "secure camps". I think that thought had never occurred to him and he was quite surprised at its obviousness. The assumption that these guys, because they are "backward" and poor, are also stupid is a very dangerous one.

Stoneleigh - Which countries will fare better than which. According to Denninger on TickerForum, the US is screwed but everyone else is screwed worse. I must say that I cannot follow his logic. As proof he points out that European and Asian banks are levered at a higher rate than US banks. Fair. However, Karl overlooks the fact that the overall US economy is more debt encumbered than pretty much any other economy. Also, unlike many other European and Asian countries, our productive base has not been depleted. I see the follow hierarchy:

1. China (they are in serious trouble but will fare better than many in this crisis)

2. Rest of Asia (don't have the same reserves and manufacturing base to draw on. China is the manufacturing super-power now and yes, some form of demand will continue to exist unless everyone dies off suddenly).

I’m sure to get ripped to shreds for this comment, and I am not defending Ms. Palin’s statement(s), however, if some people believe that the US Military would have little discomfort turning on the civilian population if ordered to, is it that far a stretch to think that the health planning committees (or whatever they are called in the health care bill) could be called upon to start deciding which citizens are useful and which are not?

I think direct conflict with Iran is a very low probability event precisely because of the pipeline issue. Access to Iranian oil and natural gas is not the only rationale for improving relations with Iran. Perhaps the greater rationale relates to the pipeline issue. The US would dearly love for Iran to build pipelines across its soil to deliver natural gas from the central Asia (Turkmenistan for example). However, as long as the US and Iran are at odds, Iran will remain allied to Russia. Russia wants, above all else, to monopolize the export of natural gas from the Central Asia. Rancorous relations between US and Iran serve this goal by walling off Iranian territory that would otherwise serve as an export route capable of competing with Russian pipelines.

How long can the bankstas keep this fraud going? That's what I wanna know. Many a faith based investor was brainwashed enough to adhere to the advice of their broker to "invest for the longterm and ignore market fluctuations are still in the stock market. For the past several months their portfolios are showing a positive return again. I think this is the strategy of the bankstas. After all, Obamanomics is essentially a replay of Clintonomics. Yes?

Methinks there are still a lot of buyers and holders out there who left their money untouched during this market turmoil and Summers, Geithner, and Bernanke are playing them like a finely tuned, hand crafted musical instrument. Image is everything in public relations.

I've been watching The Century of the Self (6 part) series and it has provided me with a window in order to try to understand how all this mindless consumerism got started in the first place and still remains heavily entrenched in the human psyche to this very day.

How do we put an end to this horrible idea that democracy cannot function properly without predatory capitalism?

It rather depends on how you define 'doing worse'. Different countries have all sorts of different vulnerabilities, and the impact of these will vary as vulnerabilities are either aggravated or mitigated by other factors. For many countries the financial seize-up will be be far the dominant factor, depending at least in part on the reliance on credit under their existing system. For other countries energy shortages, or huge fluctuations in energy supply, will be paramount. For still others it will be their vulnerability to conflict, either because they are in possession of strategic resources, because they are a potential transit zone for strategic commodities or because they simply happen to be adjacent to highly unstable regions. The Great Powers will flood resources rich areas with weaponry as they arm their client states, and this will encourage very nasty proxy wars in the periphery.

America's problem is its tremendous reliance on the credit that will inconveniently evaporate, combined with sky-high expectations and an enormous sense of entitlement due to 'American exceptionalism'. Europe has huge problems with leverage and indebtedness, a much larger housing bubble than the US and its achilles heel is energy dependence on Russia. Russia is going to enjoy yanking Europe's chain and letting it know where its allegiance should lie.

The Middle East and the Trans-Caucasus are powder kegs. In the Middle East there is tremendous overpopulation for a desert, and looming shortages of water and electricity, rapidly increasing unemployment, social instability, religious fundamentalism, aging despotic regimes, a plethora of weaponry etc.

South-Asia will suffer from over-population and water shortages, as water tables are falling by feet per year, Himalayan glaciers are melting due to climate change and energy shortages will make pumping water from hundreds of feet below the ground impossible. There is no way this region will be able to support over a billion people.

China has over-built its productive capacity to a huge extent and will see its export markets collapse. It is also highly over populated and is about to experience its version of the Dust Bowl in the north. Their environment is comprehensively ruined, hence their carrying capacity is also much lower than their population. As they are the empire in the ascendancy, they will predictably seek lebensraum elsewhere, as we did when we were in their position.

Asia is headed for their version of the 1930s (ie a set-back on the road to the Chinese century), while North America and Europe are headed for something more terminal IMO. There is nowhere that will be safe (as we currently understand the word), as this crisis is truly global. You will need to pick somewhere where you have, or can develop, a social support structure, where you can grow or otherwise obtain food, where you are not adjacent to obvious conflict zones, where you are not so isolated that anarchy will prevail, and where you can meet your energy needs. This is no easy task. The answer will often be different for different people. Best of luck in your choice.

The price of oil, in the immediate future, will be determined by those having oil tankers full of oil.

Those supplies must be sold at above their cost of acquisition. I'm sure that those big players have enough clout to keep the prices high. Of course there are many other who find it convenient to have the price of oil at + $70.

Would these be the same big players who were so smart about Mortgage-backed derivatives that they had to saddle up, ride down to Washington and extort 750 $Bil to cover their losses?

My friends are amidst a most bizarre conundrum of installing a turbine ($600K) that will only work if the grid is up. Furthermore, they must install a generator ($100K) to insure that their geothermal doesn't freeze if the power goes out in the winter.

All of this on the banks of one of the most statistically reliable river flows in all of New England.

One would have thought that they would have had this conversation earlier, but alas, they didn't and now they truly bummed.

I told them I would ask you for some advice. (This is not meant to be a freebee.)

I headed down to my local greenbelt at 5am to do a little dawn painting this morning. So unbelievably quiet, so incredibly peaceful. It really is a miracle you know, to witness such beauty. And it doesn’t cost a thing, just the willingness to roll out of bed. Painting that time of the day is quick draw time; you have to be slashing the brush in order to capture the moment.

How often we have heard "everything looks better in the morning." A cliche no doubt, and yet the diabolical propagandists historically do their dirty work in the late evening when the human spirit is typically filled with more laxity and doubt.

Perhaps by anticipating daybreak on the economy, our giddy economists looked directly into the sun and now cannot see the storm clouds hovering in the west. Blinded by the light if you will, speaking of cliches

Well, I certainly do not know one way or another but I do no one thing: planet Earth offers magic this time of day.

And by morning I mean before sunrise. A long time ago I joined a Chinese Martial Art club that practiced in Golden Gate Park every Tuesday and Thursday morning. On my first day I sauntered into the park around 8 and everyone was leaving. I learned very quickly that morning means before sunrise in the Taoist tradition.

is it that far a stretch to think that the health planning committees (or whatever they are called in the health care bill) could be called upon to start deciding which citizens are useful and which are not?

Is that not what is happening already? When people who end up in State hospitals for lack of helathcare get low or no care, when people end up functionally illiterate for lack of a functioning education system, is it not clear that choices have been made about who is valuable and who is not?

And for all the people who say, "It is not like there is room full of people deciding to withhold healthcare from the poor"...one of my favourites responses pointed out that in fact all of this, economy, health, education, military, whatever, is all the result of decisions that were made. And those decisions were generally made in rooms.

I don't see how a debt to equity transition is possible. Are we not talking about trillions of dollars of debt here? Even if in the high billions, that's a LOT of equity to conjure out of nowhere. What does that do to bank capital ratios? Are the banks suddenly worth hundreds of billions more in equity? Wouldn't that almost *immediately* devalue itself as the now converted-debt holders try to liquidate in order to get real cash for their former debt-cum-equity? Or would the created equity have to be non-transferrable preferred shares or something similar? Even so, I can't see such a monumental overnight creation of equity not having massive consequences... I'm just not sure what those consequences are.

Re: Iran - US relations and the low probability (my opinion) of military conflict in the near term.

Perhaps the biggest single factor discouraging US/Iran conflict, apart from the US/Europe desire for central Asian pipelines (discussed earlier) is Iran's ballistic missile capability. If intense military conflict were to develop, Iran could bring worldwide economic activity to a virtual standstill by firing a few salvos of ballistic missiles at Saudi Arabia's oil export terminals. Saudi Arabia's oil export terminals located on the Persian Gulf and the Red Sea represent an immense strategic vulnerability for the West (US/Europe). A few direct hits to Ras Tanura, Al Juaymah, and Az Zuluf export terminals on the Persian Gulf, as well as the Yanbu terminal on the Red Sea would wipe-out export of Saudi oil for quite a long time.

The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary” – in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopers”, hiding risks from themselves, into agents more engaged in economic activity. Hidden risks become visible; hopers become doers.

None of this is new material, but lately I've been rethinking abouthow the world's economy is going to scale down (in real down-to-earthterms)in proportion to diminishing oil supplies.

I come up with a blank. It is old news that the financial system andeconomy is reliant on perpetual growth. Debt based fiat moneyrequires it as there would be no money if all loans were repaid. Thesystem can't go backwards or even stand still - economies of scale goout the window etc.. Matt Savinar has a nice section on this in "TheOil Age is Over".

Financial armageddon (quite apart from the nukular aspect) is agiven.Perhaps this makes the nuke option more likely as things have to bebroken down before getting back on the growth treadmill. Jay Hansonemphasises the genetic "go out, get more" aspect of our natures whichsuggests that we have a lemming predisposition.

So, what I am suggesting is that (absent all out war) there will be atotal collapse of the money system with associated mayhem - andsooner than even us savvy contemplate.

Thanks for the quote, but... his example doesn't make sense? No bank would plausibly extinguish or reduce a debt claim on a homeowner in exchange for *giving* that homeowner equity in itself, essentially reversing the flow of interest. Unless he means the bank will take equity in the homeowner, which is non-sensical. Am I misunderstanding this?

I was in Washington DC doing an internship during 2001 and one of the most interesting talks I attented then was given by a speaker (her name escapes me at the moment) at the Institue for Policy Studies. Even in November of '01 there were people in DC raising their voices about the strategic location of Afganistan with regard to oil and natural gas reserves. Her thesis was that sending in the troops was primarily motivated by this reality, not the Taliban or the attacks of 9/11.

The drums of war beat loudly then and drowned out all other viewpoints. Today it looks like we in the US should have been more circumspect and actually tried to learn from the past. But that wouldn't be very American now would it?

I have read rumors of imminent attacks on Iran since 2004 when my peak oil radar truly lit up. I think the risks are simply too high for the psychopaths in power to pull it off right now. Believe it or not there are still some dedicated, level-headed people who work in governement and don't want to jump down the rabbit hole. Cheney and co. moved the line of acceptability large steps toward fascism, but there are still some who push back.

I think the only way it would possibly happen would be via our proxy state in the middle east, Israel. Even then I think it's a longshot. Whether or not the US is actually involved, any attack on Iran by Israel would be seen there as having at least tacit support from the US.

The only way I see a mass debt-to-equity conversion occuring is if it's done by legislation. The banks won't be cajoled into doing it themselves; current events indicate just how unlikely they are to make any potential sacrifice if they think they can milk any possible source of profit out of the system, and they will likely always (rightfully, sadly) expect they can.

The only way I see a coordinated, effective mass conversion program occurring is by compulsion. That would of course require a very different policy mindset coming from the not just the US gov't but many major federal governments.

As distasteful as I find it to agree with an utterly sanctimonious prick of unique egregiousness to the term, Ilargi's opening is closer to the mark than many saner and infinitely humbler erudite thinkers have crafted recently.

Just goes to show what can occur with an infinite number of monkeys and typewriters posting to a blog like TAE.

I agree that the risk of govt. bond market dislocation lingers, but I think it will take at least a year before that happens. The key in all of these equity collapse trades, regardless of whether they involve inverse ETFs or long duration govt bonds, is to resist extreme greed. Lingering too long, as you mentioned, like the Slim Pickens character in Dr Strangelove (great metaphor!) will certainly end badly.

DIYer said...Would these be the same big players who were so smart about Mortgage-backed derivatives that they had to saddle up, ride down to Washington and extort 750 $Bil to cover their losses?------- Sounds like a good guess ☺They got to make some profit from something or go back for more hand- outs.Jal----- John Brown said...Nassim Taleb keeps pushing his message that we must convert the debt to equity.------ How does that get accomplished?Issue common stock?This would dilute the dividends.If I’m not going to get a return on my investment, ( Which stocks no longer are. Casino), then the stock market will have trouble raising cash.jal

I agree that we will increasingly fall prey to ever more naked magical thinking, but it is not as if we ever traded it for science in the first place.

You might even say that the openly magical thinkers are more honest about their motives; many will admit that there's no rational basis for their beliefs.

An older relative, who refuses to give up on "drill, baby drill!" despite there being no oil to drill - almost freely admits that it's a matter of faith.

Many younger relatives, who all have internet jobs, give me elaborate scientific-smelling economic arguments for infinite growth. Many will assert that growth is unbounded, because there is no material basis for wealth at all. If that's not magical thinking, I don't know what is!

In forums like these, we tend to look down on the more openly magical thinkers, but I honestly can't see much difference between them and the sophisticates, except in the amount of energy spent in obfuscation.

I think direct conflict with Iran is a very low probability event precisely because of the pipeline issue. Access to Iranian oil and natural gas is not the only rationale for improving relations with Iran. Perhaps the greater rationale relates to the pipeline issue. The US would dearly love for Iran to build pipelines across its soil to deliver natural gas from the central Asia (Turkmenistan for example).

Ed_Gorey,

That is precisely what I meant by a straight line not necessarily being the shortest distance between two points.

Iran and the USA are, geo strategically speaking, natural allies. That is why the US sense of "amour propre" (Respect for oneself; Self-esteem) was damaged by being kicked out of Iran in 1978/79. The US has been acting like a woman spurned ever since.

"The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary” – in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopers”, hiding risks from themselves, into agents more engaged in economic activity. Hidden risks become visible; hopers become doers."

I don't see how this would work. If a homeowner is underwater by 20% on a $100K home with a $120K mortgage and the bank offers to cut a deal where they swap half the mortgage for equity, the homeowner would end up owing $60K on equity worth $40K so now they are underwater by 50%. Presumably, the bank would want the homeowner to continue to cover all carrying costs, taxes, maintenance, etc. If the bank thinks the market is going to continue to decline, then they would want a bigger portion of the equity. I expect, to cover the cost of increased risk they would also charge a higher mortgage rate. It would get very complicated and, any homeowner who still has a job is probably going to chuck it and rent.

Unless I misunderstood the premise, I don't see how this idea could work.

@ greenpaGo Goats!I'm married to one [hrmmph . . . Chinese gooble-de-gook . . . although I do like the way they've got me tagged as a Tiger : I get to eat her every time].

So I'm for: 'Contrary. Hard to control. Very smart.' Could I add, Liable to butt when challenged?'

I looked after a lame elderly one a long time back, and delivered her last, a still-birth. She had no name - but then, goats rarely need names. They don't make pets - but stand, for me, as stoical symbols of freedom.

Converting debt to equity is what corporations do when they go bankrupt. GM and Chrysler just did it, and the airlines will do it next time they go bust. Same for the hundreds of other companies that go broke every year.

For some reason, however, this solution has NOT been seriously considered as way to mend the housing market. It should be. Reducing a strapped homeowners monthly payments (as in Obama's mortgage-mod plan) will help, but it won't address the fact that many homeowners are underwater. Converting some of the mortgage to equity, however, will.

The current rhetoric about the deleveraging process is based on fantasy rather than data. In reality, true deleveraging by households, corporate firms and financial institutions has not really even started as private losses and debts of households, financial institutions and even corporations are being socialized and put on the back of the balance sheet of governments. As a consequence, lending remains impaired while re-leveraging of the public sector leads to an even bigger solvency problem down the line for the sovereign...

The right way to resolve a problem of excessive debt relative to equity capital for households, firms and financial institutions is to reduce such debt and convert it into equity.

Converting debt to equity is not uncommon. For example, it is a common solution for companies which are insolvent. As Wikipedia summarizes it:

It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the creditor hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.

Recently, Obama directed GM to convert debt to equity, and he could force the insolvent banks to do the same thing.

Indeed, investors often prefer "convertible debt" (debt that can be subsequently be converted into equity) in certain situations, such as start-up businesses. If the bondholders in the financial giants don't want to convert their debt into equity because they are holding out for a better deal, they should be forced to do so for the good of the economy.

I understand debt-to-equity swaps for banks, insurance companies, small businesses, corporate borrowers of all kinds, but for homeowners? How does that make any sense? There can't be equity in an individual.

The 47- and 53-economists are saying recovery is here because GDP is likely to be positive for the next two quarters. It just doesn't take that much to crawl back to the levels of four quarters ago. In their minds, two quarters of positive growth means the recession is over.

They could be technically right in the short term--kind of like a fever subsiding even though the infection is still rampant.

But that's all the "policy makers" want...a change in perception of how the patient looks.

May I suggest that you make a search for the phrase "when the greek language was lost in europe" in Google?

I think it may surprise you.

Essentially, many of the Greek Classics were translated to Arabic by Arab scholars who went to Byzantium. The originals were later lost when Constantinople fell to the Turks. Europe got them back centuries later when a new set of Arab scholars returned them to Ancient Greek.

There is a BBC program by Rageh Omaar all about it that was broadcast a few years ago. I found it here

By the way, the so called "Arabs" were from lots of countries including Persia, Syria, Egypt, Spain and Tunisia. They had very little in common with the real Arabs of Saudi Arabia and Yemen.

“ Both the Dow Jones Industrial Average and the Dow Jones Transportation Average have topped their January highs, developments that are regarded as a bullish signal by followers of the more-than-a-century-old Dow Theory.

The Dow industrials already had exceeded their January highs back in July, but the transportation counterpart only caught up on Friday, after the better-than-expected July jobs report.

"According to the Dow Theory, this signals a new primary uptrend and is a bullish indicator for the market," wrote Mary Ann Bartels, technical research analyst at Bank of America-Merrill Lynch, in a note.”Dow sending buy signals, according to theory

I am now thinking February '10 is a good time to short, barring wars, plagues or asteroids that is. Just sold 1/2 of my SDS at a loss."

Well as I recall, you bought that SDS when Stoneleigh was predicting a huge suckers' rally. Never go up against the Cassandra of TAE. I think the crash is coming sooner than February, I am buying into SH in early September and may swap half of it for SDS when I think the crash is underway.

I wonder if they can really keep this rally going? How long? What will be the trigger that turns the market!

Sigh, it's been so long now that I just can't imagine the market going down anymore. Logically it makes sense but I do feel emotionally that the markets will keep dancing on the bear's head. How many angels on that pin did you say?

MONICA ATTARD: Do you think that Tony Blair's zeal will eventually see him falling in behind Washington if Washington makes a decision to extend this war and go after Syria? He says he won't, but do you think that's possible?

GORE VIDAL: Well, I'm sure he says that, but what he will do is a different thing. I think he's got himself in pretty deep and I don't think he's worked out enough of an exit to get out of it because they are going to go into Syria.

MONICA ATTARD: You believe that?

GORE VIDAL: I know that, and also Iran has been marked too. I hope it isn't going to happen, I hope that the American people will wake up and stop the junta.

MONICA ATTARD: How do you know that they're going to go into Syria or Iran? Why do you say you know that?

GORE VIDAL: I have connections in Washington and I know that this is a decision that has been made. Things do go wrong and things don't happen.

MONICA ATTARD: So, but you don't think that Washington is just sabre-rattling? Isn't it possible that having just demonstrated having this capacity and willingness to act in terms of Iraq, that the Bush administration can actually achieve its aims through fear and threat?

GORE VIDAL: It has no aims other than more oil and gas because Cheney had a study done about a year ago, that by the year 2020 the entire world would be practically out of fossil fuels. They're going to grab all of it and the biggest supply is in the Caspian area and all those countries whose names end in 'stan'. That's what our eye is on.

The BBC is reporting very positively that France and Germany have come out of the recession.

Asked about why the UK seemed to be lagging behind, Business Secretary Lord Mandelson said: "Different economies will show different patterns of behaviour."

"But the key point is all these economies rely on each other; 55 to 56% of our trade is with the rest of Europe. So when [they are] recovering that is good news for our manufacturers and our exports here."

http://news.bbc.co.uk/1/hi/business/8198766.stm

I wish we didn't call these twits Lord Mandelson. They're saying that the ID cards are going to call him "Right Honourable the Lord Mandelson of Foy in the county of Herefordshire and Hartlepool in the county of Durham", but anyone whose first name happens to be "Lord" is going to have their card endorsed to make clear that they're not a real Lord.

As much as 80m barrels in offshore tankers. Sounds like a lot but, let's see, that's less than a week of U.S. imports. 5 or 6 days. Why would that be more than a minor price factor?

WSL.online - "Tankers carrying up to two million barrels each aren't counted in official statistics. Ship trackers estimate that as many as 80 million barrels may be on the water, or more than twice the amount kept in the largest commercial storage center in the U.S., in Cushing, Okla."

I've always understood that debt to equity conversion meant that bondholders of failed institutions are wiped out in the debt sense, and given equity in the reconstituted company as it emerged from bankruptcy. In that scenario the failed institution is the one that owes the bondholder; in the case of a mortgage the borrower ("homeowner") owes the failing institution, so that is a different kettle of fish. The shoe is on the other foot, so to speak.

Coy Ote said...As much as 80m barrels in offshore tankers. Sounds like a lot but, let's see, that's less than a week of U.S. imports. 5 or 6 days. Why would that be more than a minor price factor?----Why? ... because it will not all go in a week to the USA. There will be other buyers.All other suppliers will not shut down for that one week.

As usual, it takes money/credit to make money.

I think that the bankster did a good investment which should reap a very nice profit to help them balance their books.

As a former hanger-around TOD, I made the same calculation. TOD was an amazing tutorial for me on the scope and scale of the fossil fuel business. It was a series of OMFG revelations: Rita wiped out hundreds of gulf platforms, OMFG; a million barrels a day offline, OMFG; that amount is insignificant in the global oil market, OMFG; Hubbert predicted the whole shebang would peak around 2000, fifty years ago, and it looks like it's really happening! O. M. F. G. ...

So, a week or so of floating reserves ... I think that, in the grand chessgame, it is more important to look like you're getting ready for war with Iran, than it is to actually be at war with Iran. Back in the day, they could just put a microphone in front of chimpy and let him gibber, and they'd think he was crazier than the mullahs. Someday maybe they can do the same with palin. But for now, it's a matter of keeping up appearances.

And Gold in Sacks can probably arbitrage that floating 5-6 days' worth either way if they want. 'S called leverage, ya know?

The creative accounting department is working it's magic! Jonathan Weill at Bloomberg rocks!

http://tinyurl.com/mtkoem

The biggest change would be to the treatment of loans. The FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

Also Chinese Honco criticizes fake GDP data!

http://tinyurl.com/mho6ua

Hong Kong: An outspoken Communist Party official in China has confirmed long-held suspicions that GDP data was being massaged and exaggerated by regional party leaders to show higher economic growth, in the process "squandering social resources."

"Some of our GDP data sure looks rosy," Wang told party officials. "But they do not amount to growth of social wealth; in fact, social resources are beingwasted to show GDP growth." For instance, he said, provincial party officials build a bridge, which contributes to GDP; they then "dismantle" and rebuild the bridge, each time contributing to GDP. "We may have boosted our GDP this way, but this is a huge waste of social resources."

Stoneleigh says: My worry is that science, logic and rationality could be demonized in a wholesale conversion to magical thinking, and that thought frightens me more than anything else.

I’ve been sitting here trying to think whether I personally knew anyone who isn’t a magical thinker and I can’t think of one. All the teachers, students, professionals, entrepreneurs, neighbors, acquaintances, friends, family, and artists I know (including myself) base their lives on assumptions they prefer not to examine—and they defend their assumptions intensely. Yet most believe themselves highly logical and rational. The blowback on rational analysis is well underway.

The anthroposophists probably considered themselves logical and rational—their base assumption of truth led them astray. This is why I’m most comfortable with people who are aware of the limits of their analysis—whether secular or religious—and is why I enjoy reading some of the commentators here so much. The empiricists who post here tend to know their science is asymptotic and the religious hide their proclivities with a humor that suggests they know the limits of experience. The best commentators seem to know that it’s our base assumptions of the true and the real where we all go wrong—and needs to be continually examined in an asymptotic process. Such thoughts, though, are almost irrelevant before daily efforts to prepare for the collapse of centralized, industrial civilization. As Snuffy says: Back to work.

Ilargi - Before I sign off... a very heartrending photo today of the dust bowl children. All of the photos are very much appreciated.

Dorothea Lange End of the road June 1935Children of Oklahoma drought refugees on highway near Bakersfield, California. Family of six; no shelter, no food, no money and almost no gasoline. The child has bone tuberculosis

Milgard concluded: "Ordinary people, simply doing their jobs, and without any particular hostility on their part, can become agents in a terrible destructive process. Moreover, even when the destructive effects of their work become patently clear, and they are asked to carry out actions incompatible with fundamental standards of morality, relatively few people have the resources needed to resist authority."

Wiki says of the Stanford experiment:

"The experiment's result has been argued to demonstrate the impressionability and obedience of people when provided with a legitimizing ideology and social and institutional support. It is also used to illustrate cognitive dissonance theory and the power of authority."

One only has to look at a little modern history to understand that terrible things could easily happen again, given the right circumstances. It is a form of collective exceptionalism to think that our society is somehow beyond that, that although it happened in recent memory, it couldn't happen now.

Look at My Lai, look at the Khmer Rouge, Rwanda, Yugoslavia, all examples in recent times of terrible atrocities visited on innocent civilians by young men (mostly) serving authority figures. We don't really have a fix on full scale of what has happened in the Iraq yet, but Fallujah will probably emerge as another example when an accurate history is told.

To think it couldn't happen here, that somehow we are immune, is magical thinking.

Yes, back to work indeed! For that is all that is. After having read The Long Emergency, I got to work, once I could stand up straight again after that punch to the gut. Now, no more paunch in the gut. Just guts. We bought -- and paid for, 13 acres of prime farm land, really farmable, ditch- to-ditch farmland, 60 miles from New York City, four miles from our house, our "homestead" of three acres. And we began. Growing. Fuck the horses. We bought a John Deere off ebay. My husband likes engines. And he knows how to take care of them. And fix them. Last year we used about 40 gallons of diesel fuel, this year, maybe more. Last year we gave away everything -- to the homeless shelters and food pantries - thousands of pounds of vegetables. This year we have a small CSA (30 something members) and we still are donating to the homeless shelters/food pantries. It's so much work. People have no idea what it takes to get food from a seed to the table. I know I didn't. I still indulge in reading a few websites everyday, this being one of them. But I never participate. Well, very rarely. Like my farm, everyone wants the food. No one wants to weed. Or they think they want the food until they have to actually wash it and then do something with it, like cook. But those who do discover what real food is. And that is a rabbit hole. There is no going back. But my question to Stoneleigh is; is this the best use of my life force? Would my time/energy be better spent on getting my 2500 sq. ft. home off the grid? Better spent on putting up food for my family rather than growing it for others?And I do not practice biodynamic farming. I, too, have brushed shoulders with the Waldorf crowd. My son spent 1 1/2 years there. My husband couldn't stand it. And then I read John Holt. And John Taylor Gasso and The Teenage Liberation Handbook by Grace Llewellyn. And then we took our two boys out of school and have never looked back.

There has been much ado made about the military turning on the US population under orders. The US military is not a monolithic machine. Certainly some if not many units will turn against the citizens of the US if ordered to do so. But there are some units that will revolt if it comes to that. I state this with a certainty that I am willing to bet my life upon.

You are free to ignore this statement. In fact, for most of you reading this, that statement probably will not matter much. But for some, it may matter a great deal.

Greyzone - it may not be the military. I may be militias raised by these conservative Christian movements or other ideological cults that will arise when social order and central control starts to falter. The point is that under certain conditions, the fact that you are a white anglo-saxon American may not be enough to prevent you from being the "other" and suffering the consequences.

Greyzone: I just want to say that you have an exceptional combination of mind and writing voice. You and Stoneleigh are my favorites. Weaseldog, El G, and Rick James get strong honorable mentions---I enjoy your posts too. Although El G *is* a raving communist.

"Of two minds" http://www.oftwominds.com/blog.htmlhas just put up some interesting info Grain, Drought and Systemic Risk

"Nobody realizes that only 1% of the US population are real farmers. 70%+ of our food supply is grown by them in a relatively small area of the Midwest between Southern Minnesota to Texas and Eastern Nebraska to Ohio. So most of our food, the only thing we need every day to survive, is grown by 1% of the population in the middle of the country whereas most of the rest of the population lives within 20 miles of the coasts."

"One solution I know of is to NOT live in a big city. The bigger the city, the worse it will be. And, as I mentioned, living in an area where the crops are irrigated will also be a solution. But getting to that area from a big city when there's no fuel to get out with and rioting going on there will make it hard to make it to an irrigated area once the disaster hits. So a prudent person should do that ahead of time, IMHO."jal

Alas you are wrong about Ahimsa being the only 'pure' one here. There is more then one so she is certainly not alone. And it really is not so much about purity as wisdom and compassion. But referring to Ahimsa as 'pure' in fact is delivering a great complement. How many in this world are filled with wisdom and compassion. How many 'pure' visionaries do you surround yourself with?Indeed it would be a sad world without the 'pure' ones: Buddha, Christ, Lao Tse, Mother Teresa, the Dalai Lama, Martin Luther King, Thoreau, A.Sadat, Gandhi...just to mention a minuscule few and the countless ones who have come and gone whose names we do not now

The world is a mess and thank God for the 'pure' minority who have come in to this world to try and make a difference - and put an end to suffering. They stand in true contrast to the 'impure' herd majority who go through life in a heartless selfish way without thinking deeply about much of anything - full of ego and self importance - thinking only of themselves and not of the greater good of humanity.

A fundamental error made by most human beings is that homo sapiens is a rational species. Cure yourself of that myth and things become both clearer and more interesting. Rationality is a useful tool but one that we do not turn to sufficiently to really alter our behavior on a macro level. And it's also a tool that we do not use on a frequent enough basis to justify calling ourselves a rational species.

Once you have convinced yourself that homo sapiens is not a rational species, you are then free to convince yourself that homo sapiens is a rationalizing species. This is another terribly useful insight, especially in dealing with other human beings.

El G...Plan b is the sailboat.......got a nice 26ft or so laying around ...cheap?...like say a pearson 26?...or a morgan.out-island30... was looking hard at thishttp://portland.craigslist.org/mlt/boa/1314564633.html

Normally this wouldn't be possible, as the political process will do everything it can to prevent this outcome. No sweets to the middle class means no votes to the politicians. Let's see if it will happen this time.

Politicians must put more money into the system. If they don't, energy will become too cheap and there will be no signal to invest in it. Then we will all really be up shit creek without a paddle.

One problem is the internet. It causes people to be able to think with their own brains, causing havoc to the velocity of money (and thus eventually to the energy sector).

The internet has to be dismantled for the sake of the common good. OK, that will mean that our corrupt politicians will not be replaced. But that will be a small price to pay.

Greyzone - it may not be the military. I may be militias raised by these conservative Christian movements or other ideological cults that will arise when social order and central control starts to falter. The point is that under certain conditions, the fact that you are a white anglo-saxon American may not be enough to prevent you from being the "other" and suffering the consequences.

Dr J, I did not take that as the point. I took it to mean that shooting someone who is other is admittedly easier than shooting someone "from your tribe" Therefore the tragedy of the civilians killed in fighting in Iraq, Afghanistan, Vietnam, Korea, Japan, Germany. When you are part of the military machine, rarely is it to further American imperialism. It is to serve your country, to see the world, to do more before six am than most people do all day. To be an army of one, well not so much but I digress. Though with the color of authority we can all do horrible things we would not normally do, the less we can identify the victim of our efforts as other the more we suffer and the sooner either the color of authority fails or we fail. I think that accounts for much of the high suicide and PTSD we see currently. I know when I took that oath to defend and protect the constitution from enemies foreign and domestic, the foreign part was much easier to fathom, the domestic were always in my mind the bad guy from the Jimmy Stewart movies, the old bald white guy, who was either a banker or a senator. It will be harder for American troops to shoot Americans. As said before, the response will not be monolithic, some will more happily "restore order" by whatever means necessary, others will be unable to do so under any circumstance. And as time goes on, it will become harder and harder for more and more. This means that long term involuntary police state/martial law is unlikely. Short term, limited yes maybe, especially with the proper window dressing. As to your stated point on the rabid christian fundamentalists, that is a whole different kettle of fish, because if what you describe is happening then we are in a state of true civil war and the tribe is broken, sometimes on the basis of skin color sometimes religion, maybe even whether or not you eat meat or not.

Anon 11:50 glorified purity. I disagree, purity is a thankfully rare and dangerous thing. It is inherently unstable and usually false, but besides that it is not always light. Hate can also be pure, as can contempt and fear and ignorance. Every dark side and nature of what we are might be purely manifested, not only the light ones. I have yet to meet any one who is truly pure, but I have met many who think they are, and I find them very scary. I am pretty sure spice was not truly condemning ahimsa for her "purity", but for what was read by at least myself as being sanctimonious. A trait I think less common among those that truly manifest wisdom and compassion. That impression may have been unintended and may be a failure of mine as a reader, but I don't think it was a failure limited to just me or even just a few.

One thing that gives me hope re t'internet, is that as I understand it, it was designed by the military to withstand attempts at dismantling - with many nucleii/servers rather than one large frankenstein style ON/OFF switch.I'm less worried about server shut down than the control of the transfer of informaiton via satellite communication/cell phone breakdown.I did a bit of digging on this technology a while back, it looks like it's concentrated in the hands of a few companies, which could be sequestered in a divide and conquer shut down.If anyone's got any more info about who really rules the (EMF) waves, some pointers as to where to look would be good.I think this is a recurring theme throughout this crisis - don't put all your bloody eggs in one basket, put some in a hatchery, and make sure they're carrier pigeon eggs! Right. I'll get my two tin cans and long piece of string.Oh and an AM radio.

It will be harder for American troops to shoot Americans. As said before, the response will not be monolithic, some will more happily "restore order" by whatever means necessary, others will be unable to do so under any circumstance. And as time goes on, it will become harder and harder for more and more. This means that long term involuntary police state/martial law is unlikely. Short term, limited yes maybe, especially with the proper window dressing.

YD,

Earlier, I mentioned that people who think that unmentionable acts can be committed by the military (of any country) against its own civilians is "delusional".

Since you seem to agree that such acts are conceivable, at least for a brief period, I will explain how it can be done on a long-term basis. This is something that empires like the Romans and British were especially accomplished at doing.

The Romans used their second-tier troops in guard duty - the first-tier was kept in reserve or used in more exposed locations. If you were to visit Hadrian's Wall, you would find lots of graffiti by soldiers from places as far away as Syria. The Britons who were in the Roman army were kept far away from the British Isles.

The British had a similar system whereby the Sikh's would be kept far away from the Punjab and so on. The Scots would be guarding Ireland and the Irish Guards sent to Egypt.

I realize that the US is not so obviously composed of different peoples - but they are there. You can split up the population by all sort of measures - religion, colour, geography and so on. Divide and rule is what it is called.

The internet is highly vulnerable to energy shocks and physical damage to cables. Last year large parts of India and the middle east lost access to the internet as cables were cut by ships dropping their anchors about 3 times!

The internet is quite vulnerable to viruses, attacks where hackers imply overwhelm the servers with requests - such as getting 5 million messages in your inbox in 1 minute.

Also I don't know if this bill passed or not but the US cybersecurity act of 2009 gave Obama the power to shut down the Internet.

The Cybersecurity Act of 2009 (PDF) gives the president the ability to “declare a cybersecurity emergency” and shut down or limit Internet traffic in any “critical” information network “in the interest of national security.” The bill does not define a critical information network or a cybersecurity emergency. That definition would be left to the president.

The bill does not only add to the power of the president. It also grants the Secretary of Commerce “access to all relevant data concerning [critical] networks without regard to any provision of law, regulation, rule, or policy restricting such access.” This means he or she can monitor or access any data on private or public networks without regard to privacy laws.

Hi VKWhere there are cables I can imagine this being an issue - I'd love to know how the assembly is done though - IIRC there's a major mid-atlantic fibre optic, sure there are others, but what about dongle based/mobile internet - do these go through the same 'pinch points'?I've never seen schematics of how the information gets transported - I tried to find out who owns/runs the salient satcoms and didn't get very far..

As of the end of June, Colonial had assets of $25.5 billion and liabilities of at least $24.2 billion, which includes deposits of $20 billion. Colonial BancGroup says it has more than 340 branches in five states: Alabama, Florida, Georgia, Nevada and Texas.

YD - what the Milgard and Stanford experiments showed was that ordinary people, in certain circumstances, can be made to commit atrocities on people who, for all intents and purposes, are from their own 'tribe'. The set up for this is the establishment of a differentiation, subtle in the Milgard case, not so much in Stanford, and an authority that directed the action. The frightening aspect of these experiments was the ease with which this transformation occurred. When on looks around at what has been happening with religion, politics, race, etc. it seems to me that the flames of those differentiations are being fanned by people in authority - the Rush Limbaughs, Sarah Palins, Glen Becks, etc. It reminds me of the lead up to the Rwanda massacres where the media were used to rally one group against the other. One wouldn't know how deep or how dangerous these rifts are until social inhibition becomes unfettered and people are encouraged to act upon their biases by persons in 'authority'. Awhile back I met an engineer who was commuting to Denver for work. She commented on how people in her work environment there, when someone they didn't know was referred to, would ask: are they white? are they Christian? what church do they attend? Overt sorting of us and them. How deeply riven is American society by this dangerous sorting? I fear we may be surprised if and when social order breaks down and vital resources become scarce.

Here's a map of the global fibre optic network with related incidents of damage, sure a lot of communicatons does take place by satellite but fibre optic cables are what holds the whole system together.

While we could be seeing the end of the rally, I think (on balance of probabilities) that we will instead see a pullback followed by a new recovery high. Pullbacks, particularly significant ones are accompanied by fear, so we can expect to see that reflected in the headlines. We are entering dangerous territory when it comes to trying to play these moves IMO. Both the downside and the upside could be limited for a while, so risk takers would need a short time horizon.

Even once the rally is well and truly over, playing a crash would also have significant risks. You may have to be both right as to the trend and lucky in order to actually be able to collect. If the market seizes up and brokerages go under, being right on its own may not be enough. Whatever you decide to do, be careful. This risks will be far higher than anything we have experienced in our lifetimes. It is far safer to sit on the sidelines in cash, and IMO this is what most people should be doing.

Thanks for the heads up. What kind of lead time do you figure? I notice that the Hang Seng and Nikkei are are still peaking with the Western indexes in the suckers' rally. Do you think the other Asian indices will turn down prior to the West or stay in sink to the bitter end? I am still going with the plan of buying -1X SH around Sep 1 and converting it to SDS after I am sure the downturn is under way. I need a score - can't live of 0.18% annual interest :-(

Anon 11:05 PM

"Although El G *is* a raving communist."

Raving - Si; Communista - No.

And I always thought I was a vulture capitalist. Perhaps our anonymouse mistakes "communist" for anger at a government that has been usurped by Gollem Sucks and a certain contempt for the body politic of a nation that would allow it to happen? Though my philosophical and religious views differ markedly from our kind hosts, my sociopolitical views are quite congruent. Maybe I believe in Goatism. I have one as an adopted son.

Thanks, as always, for the latest predictive analysis. I am not intending to gamble more than I feel I can afford to lose. If this money weren't shorting the market, it would be sitting in 13 week T-bills earning a small fraction of a percent interest. I do not need this money in the foreseeable future, so I would have no pressure to sell it for a private, personal reason.

I really can't see the upside past 1100, and I would rather get in early even if it meant leaving a little on the table. I agree that the real downside risks involve the ETF company or the broker foundering, and as mentioned earlier, I will try to keep my ear to the ground. If Lloyd Blankfein's wife declares nation wide martial law based on a Hampton charity show meltdown, I will bail promptly. My corresponding bank to TD.gov is Scotia, and I think they will be in the last tranche to go belly up.

How quickly to you see a complete freeze up of markets after the real downturn starts? I figure short ETF's will be very liquid until a piston arm goes through the head, as people will be dying to buy them. As usual, I welcome and ruminate on your opinions.